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What’s the deal with earnest money?

One of the best things you can do before you start shopping for a home is to take a look at the sales contract you’ll fill in when you do decide to make an offer. That way you’re not trying to figure out what you’re agreeing to as you rush to get that contract to the seller.

One section that can be kind of confusing is earnest money. Some agents describe it as a way to show you “have some skin in the game.” But what exactly does that mean?

Basically earnest money shows the sellers you’re serious about purchasing their property. Think of it like this: if you put $500 down in earnest money, it’d be easy for you to walk away from the deal if you decide you just don’t like the wall colors, are frustrated that the sellers refused to fill in nail holes in the walls or decide you like another home better. But if you put $3,000 down in earnest money, there’s a good chance you won’t risk losing all that cash by walking away from the deal.

Earnest money is typically 1% - 3% of the property’s sales price and is paid before closing. While it’s meant to show you’re making the offer in good faith, it also helps protect the seller if the buyer backs out of purchasing the home for a reason other than the contingencies outlined in the sales contract.

If the deal falls apart, the circumstances of the fall out dictate who gets the earnest money. A neutral third party holds onto the earnest money until closing and will disburse it if needed.

While some contracts do fall apart, most make it to closing. When that happens, the earnest money goes towards the buyer’s down payment and closing costs.

Our team of expert Mortgage Loan Originators is here to answer any questions you have about earnest money, or any other part of the home-buying process. If you’re ready to get started filling out your loan application, you can apply now through our secure online portal, or call 1-833-634-8121 to connect with a local lender.