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Earnest Money in Real Estate

What is Earnest Money in Real Estate?

December 21, 2022

As a future homeowner, you may wonder about earnest money and where it fits in buying residential real estate. This important transaction lets a seller know you are serious about buying and ready to begin the purchase process. This deposit is applied to the total purchasing price of a home and goes towards your down payment or your closing costs at the end of the sale.

What’s the Difference Between Earnest Money and a Down Payment?

When you present earnest money to a home seller, it is considered a “good faith” deposit. This gesture lets the seller know that you are serious about purchasing the home and you are ready to begin the buying process. The amount of money is less than the total down payment, usually between 3% and 20% of the home’s total cost. While the selling process is underway, the earnest money is held in what is known as an escrow account, usually facilitated by a neutral third party – not the buyer or the seller – such as the title company or a real estate agent.

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Can You Get Your Earnest Money Back?

Once your earnest money is paid to the seller, the transaction can be motioned, which requires time, money and resources. For this reason, the deposited money is non-refundable. Should you decide not to go through with the purchase halfway through the sale, the deposit can be applied towards the person-hours spent on document preparation. This scenario can be avoided by writing a contingency clause into the purchase agreement so that if the sale falls through during the inspection, appraisal or financing stages you can get your earnest money back due to any number of extraneous circumstances.

What Happens to Earnest Money at Closing?

After a successful sale, earnest money paid by the buyer to the seller is generally applied to the closing costs or used for the down payment. This earnest money secures the agreement between both parties and assures that the conditions of purchase have been fulfilled. Taking this essential step is an integral part of the buying process, as earnest money is usually non-refundable if the needs of the purchase are not met upon closing.

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What is an Appropriate Amount of Earnest Money?

The minimum amount of earnest money you can put down on a home is usually 1% of the total costs of the home. The maximum amount is 3% of the total cost of the home. The higher the amount you can afford up front, the less you will need for the entire deposit at the sale’s closing. Depending on the market you choose to buy in, the amount you put down may be higher in places where homes are in high demand.

Now that you know more about earnest money and how it works with the home buying process, you’re ready to start looking for your perfect home with McArthur Homes. Our expert lenders will work with you to get the best financing options available so you can focus on finding your dream home. With new homes offered throughout Utah County, we will surely have something that meets all your needs. Contact us today and let us help you find the perfect place to call home.

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This post was written by Paige Giles

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