Most homebuyers today understand they need a sizeable down payment and a strong credit score to secure a conforming home loan. Buyers also must hold liquid funds for another financial obligation – an earnest money deposit – to be paid when they make an offer on a home.
In short, earnest money is handed over to the seller’s agent or the title company when a purchase contract is signed. This demonstrates that the buyer is serious about the transaction and is backing it up with cash.
Without earnest money, buyers could simply make offers on many homes, essentially taking them off the market until they choose a favorite. Sellers rarely will accept offers without such deposits.
There is no set amount for an earnest money deposit so it can be up for negotiation. If the home is popular with multiple bidders, the seller may ask for up to 3% of the asking price as earnest money. Ideally, the amount is enough to impress the sellers, particularly when they’re entertaining several offers.
Assuming the transaction results in an accepted offer, earnest money goes toward the buyer’s down payment and closing costs. If the transaction falls through, the buyer may have to forfeit a nominal cancellation fee or more.
Be sure the purchase agreement outlines the refund process. Remember, a buyer can lose earnest money through default, which happens when he or she does not perform according to the terms stipulated in a purchase and sale agreement.
Work carefully with your Prudential Real Estate agent to ensure a clear understanding of all terms and obligations.