The Earnest Money Deposit

Posted on: September 29, 2014

An important part of the home purchase process is the earnest money or good faith deposit. An earnest money deposit shows the sellers that you’re serious about buying their home. A larger deposit can often pave the way to a smooth closing, when a small deposit could prompt argumentative or unhappy sellers, or even lead to the rejection of your offer. Make sure you handle the earnest deposit in a way that protects your interests and still entices the buyers, and know what’s legally required and what is safe for your money.


No Earnest Deposit is Legally Required


Contrary to popular belief or what sellers would try to tell you, no earnest money deposit is required to cement a home purchase. All you really need to do is make an offer that the seller accepts, and get a signed purchase and sale agreement. But many sellers want an earnest deposit, so while it’s not legally required, your offer may be rejected if you don’t offer a good faith deposit. An earnest money deposit may range from one half a percent to 10 percent of the total purchase price.


Don’t Give the Sellers Your Deposit


In most home closings, you should never give the sellers your earnest deposit. The deposit should be held in trust or escrow by an impartial third party; typically the title agent, an escrow agent or a lawyer. If the deal falls through, you should be able to get your deposit back.


What Happens to the Money?


If your sale goes forward and proceeds smoothly, your earnest deposit will go toward your down payment and settlement costs. If the deal falls through in spite of good faith efforts to negotiate, you may be entitled to receive your deposit back. If the sellers refuse to sign a release for you to receive your deposit, you and the seller must agree on a form of dispute resolution to resolve the fight for the money.


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