There are a lot of expenses involved with buying a home. Although a home mortgage will cover a lot of the home’s price, you’ll also be responsible for making a down payment as well as paying for closing costs. However, one upfront cost you may not be familiar with is the earnest money deposit.
What Is Earnest Money?
Earnest money is commonly referred to as a good faith deposit. Essentially, it’s a sum of money the buyer puts into escrow after a sale agreement has been reached. Earnest money shows the seller that the buyer is serious about the purchase. It can prevent the buyer from making bids on multiple houses and reduce the risk of the sale falling through.
After all, sellers must relist their homes if a sale doesn’t go through and can end up losing a lot of money as a result – especially if they rejected other offers that were on the table.
How Much Earnest Money Do You Have?
The buyer will put around 1-3 percent of the home’s purchase price into escrow. If the buyer backs out because one of the contingencies wasn’t met, the earnest money will be returned. If buyers back out for no reason other than they changed their minds, sellers will keep the earnest money as compensation for their time.
If the sale does go through, then the earnest money will usually be applied to the down payment or closing costs. It’s not an extra expense but a deposit that shows the buyer is serious. It will be applied towards an already existing expense.
If you’re buying a home, expect to put down some earnest money. For more home buying tips, contact us at Randy Lindsay today.