The Role of Earnest Money
To show that you are serious about buying the home you are making an offer on, you should be prepared to write a check for what is called "earnest money". Earnest money is an amount that is held in a trust account until the transaction is settled or "closed". This deposit is meant to prove that you are sincere in your intent to purchase the property and that your offer is "in earnest".
The purpose of making a deposit that accompanies your offer is to convince that seller that you mean business. The amount varies, but is typically under two percent of the purchase price. When the transaction is finalized, the earnest money is applied to your down payment or "bottom line" and closing costs.
If the deal were to fall through early on in the process, the earnest money deposit is usually returned to the buyer without question. However, when the transaction is further along, the buyer may need to negotiate with the seller regarding the distribution of the earnest money, particularly if the failure to complete the transaction is the buyer's fault. The seller may for example ask that some of the deposit go to cover the contract cancelation fees.
The earnest money deposit is a guarantee of the buyer's good intentions, and is sometimes called a "good faith" deposit.
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