An earnest money deposit is made when a buyer is serious about a home purchase and wants to show their good faith. This amount is usually around 1% to 3% of the sales price.
The money is then held in an escrow account until the home sale is finalized. But what happens if a sale falls through? Who is entitled to that money?
Here, we go over earnest money and what happens to it in the most common scenarios. Read further!
How much earnest money should you expect?
As stated previously, the typical range is 1% to 3% of the home sale. However, if a buyer really wants to show they have nothing to lose they can put more down.
The earnest money deposit is decided upon by the seller and their listing agent and is listed in the agreement.
In a buyer’s market, you can expect to see this percentage on the lower end, and vice versa in a seller’s market.
Where does the money come from – and where does it go?
An earnest money deposit has to be cash either in the form of a check or wire transfer.
The seller’s Real Estate broker or title company is typically who holds the deposit in an escrow account.
Not often, but sometimes the company holding the funds will just hold the check if the money was not wired. As the seller, make sure the check is cashed to ensure that you are protecting yourself.
A seller is entitled to receive the earnest money deposit unless there is a contingency in place that states otherwise. Contingencies are agreed-upon rules that are included in the contract.
Typical contingencies could include:
- Financing – The buyer could not secure a mortgage or their financing falls through.
- Condition – Undisclosed problems with the home are brought up during a home inspection. These issues are generally large such as electrical problems or a bad roof. Sellers can sell their home “as is”, but a buyer can back out within the allotted time of the inspection period and still get their deposit back.
- Title search – If the title comes back with liens against it or other issues, a buyer can generally cancel the contract and receive their earnest money back.
- Appraisal – These are common contingencies because many loan options, such as FHA, will not loan more than what the property appraises for. If the appraisal comes in lower than what the seller is asking for, a buyer can still walk away with their deposit.
The good news is that these contingencies can be set up with time frames. The buyer will have so many days to have an inspection done or to secure financing. These rules are what allows for both sides to complete an organized sale.
Are you selling your home soon? Check out some of our other helpful blogs to get you started!