> Earnest Money

Earnest Money

Earnest money is a deposit made by a potential buyer to secure their right to put the property under contract. It is a part of the purchase agreement and is often called a good faith deposit. Once under contract, the seller will take the property off the market, foregoing other offers and potential sales. The earnest money protects the seller if the buyer backs out of the purchase.

The amount of earnest money is typically one to three percent of the sale price. However, it can be lower for less desirable or distressed properties or higher for desirable properties in active markets. 

Earnest money is held in escrow by a third party until the purchase is completed. At that point, the money is applied to the closing costs or down payment.

If the home inspection fails or some other contract contingency isn’t met by the seller, the earnest money is refunded to the buyer. Typical contract contingencies include the property appraisal matching the price, mortgage approval for the buyer, or the sale of an existing property before the purchase.