Earnest Money
Earnest money is a deposit made by a buyer to show good faith when making an offer on a property, which is typically applied to the purchase price at closing.
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Exam Tip
Earnest money shows buyer is serious. Held in escrow (not by seller). Refundable during contingency period. May be forfeited if buyer defaults.
What is Earnest Money?
Earnest money (also called a good faith deposit) is a payment made by buyers when making an offer to demonstrate their commitment to purchasing the property. It shows the seller that the buyer is serious about the transaction.
Typical Earnest Money Amounts
| Market Condition | Typical Amount |
|---|---|
| Buyer's Market | 1% of purchase price |
| Normal Market | 1-3% of purchase price |
| Seller's Market | 3-5%+ of purchase price |
| Competitive Offer | Higher percentage to stand out |
Where Earnest Money Is Held
Earnest money is typically deposited into a trust or escrow account held by:
- Title company
- Real estate brokerage
- Attorney
- Escrow company
What Happens to Earnest Money?
| Outcome | Earnest Money Result |
|---|---|
| Successful Closing | Applied to down payment or closing costs |
| Buyer Cancels Within Contingency | Typically refunded to buyer |
| Buyer Defaults | May be forfeited to seller as liquidated damages |
| Seller Defaults | Returned to buyer (plus possible damages) |
Contingency Protection
Earnest money is typically refundable if the buyer cancels for reasons allowed in the contract:
- Failed home inspection
- Financing falls through
- Appraisal too low
- Title issues discovered
Forfeit Conditions
Buyer may lose earnest money if:
- Buyer backs out without valid reason
- Buyer misses contingency deadlines
- Buyer fails to perform as agreed
Exam Alert
Earnest money is NOT required by law but is customary in most transactions. It's held in escrow (not by the seller) and applied to the purchase price at closing. Know that it can be refunded during contingency periods but may be forfeited if buyer defaults.
Study This Term In
Related Terms
Escrow
Escrow is a neutral third-party arrangement where documents and funds are held until all conditions of a transaction are satisfied.
Closing (Real Estate)
Closing is the final step in a real estate transaction where ownership transfers from seller to buyer, documents are signed, funds are exchanged, and the deed is recorded.
Contingency
A contingency is a condition or clause in a real estate contract that must be satisfied before the transaction can close, allowing buyers to cancel without penalty if the condition is not met.
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