Home Buyers: What You Need to Know About Earnest Money
What's an earnest money deposit and what's it all about?
Before any document or agreement can become a legal and binding contract, for both sides, there has to be consideration. Something must be offered as evidence and proof that an agreement is more than just a person's word to buy. Earnest money is that consideration. The more money you put down, the more earnest you are display to the seller that you indeed want to buy this home.
But how much shows good earnest?
An excellent question with no black and white answer. All real estate transactions are individual circumstances and situations and require different approaches. But, as a general rule of thumb, earnest money usually falls within 2% to 5% of the purchase price.
When do I need to pay this?
You place earnest money at the time of an offer in either check or money order form. I take this check with me when we present your offer, but keep the check in my possession. If your purchase is subject to the acceptance of an inspection, the check can be deposited after you have accepted the inspection in some cases, but is usually deposited within two business days of an accepted offer.
What happens to my earnest money and how is it used?
Earnest money will go into a trust account held by a third party (usually the escrow company). This way, neither seller nor buyer have access to it and it can be legally considered as earnest consideration to buy property. Eventually, it will be applied toward down payment closing costs.
What happens if someone defaults? Do I get my money back?
This can be a very complex question to answer, depending on the situation. Once again, here is why you need professional representation. While this question can become too deep to answer in a simple sentence, the general rule is that if a buyer backs out for no legitimate reason, the seller would get the earnest money. The reverse holds true if the seller backs out for no legitimate reason. Then the buyer is refunded the money. This is the basic purpose or intent of what earnest money was designed to do.
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