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First Line Realty – What is an Earnest Money Deposit in a Real Estate Transaction?

What is an earnest money deposit in a real estate transaction? Many buyers know they need to spend money to purchase a home, but many do not know when they need to put a deposit down or how much that typically can be. The earnest money deposit is the initial deposit that a buyer would put towards purchasing a home to show good faith. This usually happens within a day or two of submitting the residential purchase agreement, or “offer.”

The earnest money deposit is considered a good faith deposit because it shows the seller of the home that you are willing to put money on the line and you are serious about the purchase. This deposit is typically held by the listing agent and can be cashed and put into an escrow account. If the offer is accepted and a contract is finalized the deposit will be treated as part of the down payment. However, if the buyer breaks the contract there is a chance that the earnest money deposit can be lost and kept by the seller.

The seller may be able to keep this deposit if the buyer breaks terms of the contract. That being said, the buyer has rights set forth in contingencies that will allow the buyer to walk away from the contract and have the earnest money deposit returned. These contingency periods are determined by the buyer in the offer so it is important to make sure the buyer is working with an educated Realtor to make sure they are aware of these time periods so they know when they can cancel the contract without losing their deposit.

There is no definitive amount for an earnest money deposit. It is simply up to the buyer to decide how much they would like to put down. Typically, it can be anywhere between 1-5% of the home’s sale price. A buyer may want to put more money down to show the seller that they are very serious about the purchase which could make your offer stronger when comparing with others.

In summary, it is important for the buyer to know the contingencies and what obligations and responsibilities they have during these times periods. It is essential to pay close attention to what needs done when so the buyer does not lose the earnest money deposit. If you are unsure of this ask your Realtor for guidance. A good Realtor will keep track of these time periods for you so you can rest assured knowing there is an extra set of eyes on these time frames.