You have been searching the market for the perfect home and found one that is for you. If you are serious about the offer, you will give the buyer a deposit of earnest money that they will hold onto until your offer is accepted by the seller. But what exactly is earnest money and how is it used?

Earnest Money Keeps Buyers Dedicated

Simply put, when a buyer puts earnest money on a home, it shows the seller that they are committed to purchasing the home. Otherwise, a buyer could put multiple offers on different homes, which then takes the home off of the market. Earnest money keeps the buyer dedicated to their offer and discourages them from making several offers on other homes to “weigh their options,” which is a huge waste of a seller’s time.

Earnest Money Funds the Home Purchase

Earnest money is held in a joint escrow account or trust by the seller and buyer of a home which goes towards the down payment and closing costs when the home purchase is complete. Earnest money also gives the buyer more time to find financing for the home.

The amount of earnest money a buyer puts on a home varies based on how demanding the housing market is at the time. Typically, buyers can put in a minimum of $500 or 1-2% of how much the home offer. Buyers can work with the seller to determine how much of a deposit you can put down on the home.

Returning Earnest Money

If a buyer decides not to go through with the home purchase after all, they may not get their deposit of earnest money  because a lot of time and money was spent on the home by the seller. If you are the seller and you break the real estate contract with the buyer after they’ve given you their deposit of earnest money, you must give the money back.

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The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.