The Importance of Earnest Money

by Investing School on September 30, 2011

Earnest money, sometimes called a “good faith deposit” or simply “earnest”, is a deposit made to a seller to show that the buyer is serious about the purchase. Most commonly used in real estate purchases, earnest money may be put down in order to give the buyer more time to pull together needed financing.

The money is put in an escrow account and is credited to the buyer’s down payment. The funds may also be held by the title company, the real estate broker or the settlement company.

Depending upon how the agreement is written the buyer may or may not be able to reclaim his funds. If the financing falls through and the buyer pulls out of the agreement the earnest money may be claimed by the seller. If, however the seller severs the agreement then the money is returned.

How much earnest money is provided in a deal varies a great deal depending upon where you are and what you are purchasing. In residential real estate sales 3% is fairly common. When entering into such an agreement it is critical to determine what will happen if the deal is voided by either party. 3% of a $200,000 home is $6,000, and few people can afford to lose that much if circumstances change.

Earnest money is also used by contractors who are bidding on government sponsored contracts. This indicates a serious interest in the project on the table. If the contractor fails to win the project, the earnest money is returned.

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