Develop and improve products. List of Partners vendors. Table of Contents Expand. Table of Contents. What Is an Earnest Money Deposit? By Elizabeth Weintraub. Learn about our editorial policies. Updated September 01, Reviewed by JeFreda R.
Article Reviewed August 21, JeFreda R. Brown is a financial consultant, Certified Financial Education Instructor, and researcher who has assisted thousands of clients over a more than two-decade career. Learn about our Financial Review Board. When submitting your earnest money deposit, it's important to protect yourself by working with a reputable third party and getting a receipt. Besides being scammed, you can also lose your earnest money deposit if you don't follow the terms of your purchase contract.
Note An experienced real estate agent can advise you on the typical earnest money percentage in your area. Article Sources. Your Privacy Rights. To change or withdraw your consent choices for TheBalance. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. Earnest money is a type of security deposit made to a home seller that shows the home buyer is serious about purchasing the home. This is a more informal part of a home purchase and purchase contract.
Often confused with a good faith deposit, an earnest money deposit allots you a certain amount of time to secure your mortgage financing and complete the other steps in the home buying process , like appraisals and home inspections. Typically, an earnest money deposit is only refundable under certain circumstances.
This is the amount that you would submit after the purchase agreement is accepted. Percentage: In other markets, common practice will be to have the earnest money tied to a certain percentage of the purchase price. Remember that, once deposited into an escrow account, your earnest money will earn interest. An earnest money deposit can differentiate you from other buyers making offers in a highly competitive market.
During the course of closing on a home, earnest money acts as a form of insurance for the seller. If you breach the terms of the contract and decide to walk away from the sale without a valid reason, the seller may get to keep the deposit to compensate for their loss.
If everything goes according to plan and the home sale goes through without a hitch, then the earnest money deposit will be applied toward your down payment and closing costs.
Be sure to ask your real estate agent about the specific terms around your earnest money deposit. While an earnest money deposit and down payment are both initial costs of buying a home, they each serve different purposes in the overall transaction. When you buy a home, the down payment goes toward the total amount of your home. Down payments help determine your loan-to-value ratio—a figure that lenders use to assess the risk of your loan. Bigger down payments can improve your loan-to-value ratio and make it less likely that lenders will attach additional costs to your loan.
Smaller down payments can weaken your loan-to-value ratio and make it more likely that lenders will attach additional fees that mitigate their risk. An earnest money deposit , on the other hand, is meant to reassure the seller that you have intent to buy. Popular Courses. Business Essentials Guide to Mergers and Acquisitions. Business Business Essentials.
What Is Good Faith Money? Key Takeaways Good faith money acts as a security deposit towards completing a purchase. This payment is usually nonrefundable but credited towards the final purchase price. When the seller wants to both qualify and motivate a buyer, the deposit amount asked for will be larger. Depending on the supply and demand, good faith money amounts can vary as a percentage of the final price.
Both seller and buyer should specify good faith money terms in writing. Good faith money often acts as a strong motivator for a buyer to close the deal as it represents a possible sunk cost; the higher the cost, the more likely they are to go through with the purchase. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
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