Glossary

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Earnest Money

When you are making a major purchase, part of the way you show the seller that you are serious is to make an earnest money deposit.  Once you determine how much you would like to offer for the purchase, you should decide how much you are willing to put down as an earnest money deposit.  If the seller agrees to the amount, it is a good indication that the purchase will take place.

It can be confusing to decide how much you want to put down as an earnest money deposit.  You want the earnest money to be large enough for the seller to take your offer seriously, but you don’t want to get yourself in a financial jam, especially when you will have to make a down payment and pay closing costs.  Some experts recommend making an earnest money deposit of 2 percent or less.  But in competitive markets, a larger offer can capture a seller’s interest and help put your offer at the top of their list.

If a seller accepts your earnest money, it is then usually placed in a trust account.  If the deal closes, the earnest money is usually added to the down payment and closing costs.  But if the deal doesn’t close, the earnest money can sometimes be in jeopardy, not really belonging to either party.  It may be because certain terms or contingencies of the contract were not completed.  Or it could be because a home inspection did not yield the results that the buyer wanted.  In these cases, it is up to both the buyer and the seller to determine how the earnest money is redistributed.  It is also likely that there will be cancellation charges, which can be taken out of the earnest money deposit.
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