When you purchase a home, there’s a certain “order of operations” that you go through. Once you make an offer and the seller has accepted it, it’s time to put down earnest money.
But what is earnest money, and what does it have to do with escrow—and what else do you need to know about it?
What is Earnest Money?
Like the name implies, earnest money is money that you put down to show that you’re serious about purchasing a home. It’s a good faith gesture, and the money is held in escrow until you close. At that point, your earnest money deposit is applied to the balance of your down payment.
Naturally, as with just about everything else in a home purchase, the amount of money you put down as an earnest money deposit is negotiable. However, if you put in an amount that is significantly lower than what would be considered customary, the seller might not be very pleased.
What to Know Before Putting Down an Earnest Money Deposit
Before you put money down, make sure you know the property and you have discussed your intentions with your Realtor®. It’s a good idea to have the home thoroughly inspected before you hand over an escrow deposit—and that you talk to your Realtor about contingencies that will get you your deposit back if something terrible comes out of the inspection.
In most cases, it’s best to have a contingency that ensures you get your deposit back if the property appraises for less than the purchase price or if something falls through with your funding, too.
You’ll also need to review all the property disclosures with your Realtor before you get serious about purchasing any home.
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