If you plan to purchase a home, you will come across the term “earnest money.” Earnest money plays a vital role in the home-buying process. As a first-time homebuyer, the concept of earnest money may raise many questions. You may wonder, “What is earnest money?” “How much am I required to pay as earnest money deposit?” “What happens to my earnest money deposit if I walk away?” In this article, our real estate attorneys at SAC Attorneys LLP answer some of the frequently asked questions (FAQs) about earnest money.
Earnest money is a deposit you pay upfront as the home buyer when submitting an offer as a sign of good faith. It demonstrates your genuine intent to purchase the property. In other words, an earnest money deposit assures the seller that you are committed to following through with the deal. If a seller accepts your offer and signs the purchase agreement, they can’t take another offer from another buyer without facing potential consequences. Essentially, the seller is bound by the contract after signing it.
There isn’t a set amount that all home buyers must pay as an earnest money deposit. The amount of earnest money deposit varies widely, but generally, it ranges from 1% to 5% of the purchase price. Usually, the buyer and seller agree on the amount that should be paid. A seller may suggest an amount, or they might wait to see what you offer.
It is vital to note that because an earnest money deposit shows a seller how serious a buyer is about making the purchase, a higher deposit could be more appealing to the seller, especially in competitive real estate markets. If a seller receives multiple offers, you might want to ensure your offer is more appealing than the others.
After paying the earnest money, it is held in an escrow account until the completion of the transaction.
An earnest money deposit is an advance payment towards the purchase of a property. If the deal proceeds without complications, your earnest money deposit will be applied toward your down payment and closing costs.
The seller should refund your earnest money if the sale falls through because of unmet contingencies. However, if no contingencies are in place and you decide to walk away, the seller may keep your earnest money deposit as compensation for lost time and potential offers.
A contingency is a part of a purchase agreement that requires a certain condition to be met before it is enforceable. Examples include home inspection contingency and financing contingency. If, for instance, an agreement contains a financing contingency and the buyer is unable to secure a mortgage, they may withdraw from the deal without forfeiting their earnest money deposit.
In rare cases, the seller might have a problem returning a buyer’s earnest money deposit despite unmet contingencies. In such cases, legal procedures are available to resolve the matter. A real estate attorney can help in such a situation.
If you are involved in an earnest money dispute, contact our experienced San Francisco real estate attorneys at SAC Attorneys LLP for help.