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What Is Earnest Money?

You found the home of your dreams and your real estate agent submitted an offer. The sellers accepted your offer. Now, it’s time to drop off the earnest money check. But, what is earnest money and why do we need it?

Earnest Money:  Earnest money is a percentage of the purchase price that a buyer agrees to pay into an escrow account after the seller accepts an offer. Typically, earnest money is between 1 – 3% of the sales price in a normal market. When there aren’t very many homes available to purchase, this percentage may be increased.

Why We Need Earnest Money:  Earnest money is not a requirement to make an offer on a home. If you’d like the seller to consider your offer seriously, however, it’s a must. The earnest money assures the seller that you, the buyer, are acting in good faith and will move forward with the purchase of the home. It also provides the seller with some sort of compensation if the buyer chooses to back out of the deal without a valid contractual reason.

Where is the Earnest Money Applied:  The earnest money is held in an escrow account at the title company or listing agent’s office until the date of the closing. This money is credited toward the buyer’s closing costs or down payment at closing. The sellers do not keep the earnest money when the sale has closed.

When Is Earnest Money Kept:  Sellers can keep earnest money when the buyer backs out of the deal for any reason not listed as a contingency on the contract.

Buyers can keep earnest money under certain circumstances like when a lien is found against the property by the title company. Another reason is that when a lender denies your loan but you have a financing contingency in the offer. A third reason is if an offer is contingent on the sale of your current home but you are unable to sell it.

A real estate agent is a great resource when you contemplate making an offer on a home. Your questions about earnest money, offering price and contingencies are important topics of discussion.

If you have questions about real estate in Carmel, Indiana or the surrounding areas, contact an experienced agent like Keith Albrecht with RE/MAX Elite Properties. With over 25 years of experience helping customer buy and sell homes, he is an expert in the market.