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  • Writer's pictureJennifer Langhals

How Much Earnest Money is Needed When Buying a Home?

what is earnest money

What is Earnest money?

Often called a good faith deposit, EM represents a buyer's commitment to purchase a property. Typically 1-5% of the purchase price, it's held in escrow by the listing agent's brokerage, a 3rd party escrow company, a title company, or the seller’s real estate attorney until closing. If the buyer doesn't comply with contract terms, the seller may be able to keep it. When the transaction is successful, the earnest money is credited to the buyer at closing.

A higher earnest money deposit can signal strong intent to the seller, potentially making your offer more attractive in competitive situations.

It's important to strike a balance that shows your commitment while also ensuring you have sufficient funds available for down payment and closing costs.

How does a Down Payment differ than Earnest Money?

Earnest money signifies a buyer's commitment, held in escrow from an accepted offer. In contrast, a down payment, often misconceived as going to lenders, is paid to the seller at time of closing.

To illustrate, consider a $500,000 home purchase. If the buyer puts a down 10%, that's $50,000. Meanwhile, the agreed-upon earnest money, at 5%, totals $25,000. In this scenario, $25,000 is held in escrow, and the remaining 5% is paid to the seller during closing.

Can a Realtor help me determine the right amount of Earnest money?

I assist by advising on reasonable earnest money, negotiating, and ensuring proper handling to protect buyer interests while respecting seller expectations and legal requirements.

For sellers: I help analyze market trends and property details to set earnest money aligning with your goals and property context.

How Can a Buyer Lose Their Earnest Money Deposit?

Buyers can risk losing their earnest money deposit if they fail to meet contingency deadlines outlined in the real estate contract or if they back out of the deal without a valid reason, as specified in the contract terms. Common reasons include missing dates for inspections, mortgage approvals, or simply changing their minds. Understanding and adhering to contract terms is crucial to safeguarding earnest money.

Working with a Realtor is crucial in this regard. Realtors bring market expertise, negotiation skills, and a deep understanding of contract terms to ensure that earnest money is held securely and that buyers are guided through the process. They can also help buyers navigate contingencies effectively, reducing the risk of losing their earnest money. Collaborating with a Realtor is an important step in safeguarding this substantial deposit.

What Happens When There is an Earnest Money Dispute?

  1. Negotiation: Initially, the parties involved, including the buyer, seller, and their respective real estate agents, may attempt to negotiate a resolution. This often involves discussions to determine the fair distribution or return of the earnest money.

  2. Mediation: If negotiations fail to reach a resolution, mediation may be recommended. A neutral third party, known as a mediator, helps facilitate discussions between the disputing parties to reach a mutually acceptable solution.

  3. Arbitration: In some cases, the contract may include an arbitration clause. This means that any disputes related to the earnest money must be resolved through arbitration, where an arbitrator acts as a judge to make a binding decision.

  4. Legal Action: If negotiation, mediation, or arbitration does not lead to a resolution, one or both parties may choose to take legal action. This involves filing a lawsuit in court, and a judge will ultimately decide the outcome of the dispute.

  5. Escrow Company Involvement: The escrow company, which holds the earnest money, may also play a role in resolving the dispute. They may follow the instructions in the contract or court order to release the funds to the appropriate party.

  6. Review of Contract Terms: The terms of the purchase contract are crucial in determining the outcome of an earnest money dispute. If the contract clearly outlines the conditions under which the earnest money can be retained or returned, it will be a significant factor in the dispute resolution process.

It's important for both parties to seek legal counsel and thoroughly review the purchase contract when a dispute arises. Real estate laws and regulations can vary by location, so consulting with an attorney who specializes in real estate disputes is advisable.

Ultimately, the resolution of an earnest money dispute will depend on the specific circumstances, the contract terms, and the willingness of the parties involved to negotiate or pursue legal action.

In essence, earnest money is the glue that holds a real estate transaction together. It's a tangible expression of your commitment to the process and plays a vital role in ensuring a successful closing. If you're considering a real estate transaction or have any questions about earnest money, I invite you to reach out to me. I'm here to provide guidance, answer your queries, and assist you in making informed decisions on your real estate journey. Don't hesitate to contact me at 720-507-9079, and let's embark on this exciting adventure together!

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