When entering a real estate transaction, understanding earnest money and deposits is essential. These funds demonstrate a buyer’s commitment and can influence the contract process. This guide explains the basics of earnest money and deposits in real estate contracts.
What Is Earnest Money?
Earnest money is a deposit made by the buyer to show serious intent to purchase a property. It is typically held in escrow until the transaction is completed or terminated. The amount varies but usually ranges from 1% to 3% of the purchase price.
This money is applied toward the buyer’s down payment or closing costs at closing. If the buyer defaults without a valid reason, the seller may keep the earnest money as compensation for taking the property off the market.
What Are Deposits?
Deposits in real estate contracts can refer to earnest money or other payments made during the transaction process. These deposits ensure the buyer’s commitment and can include escrow deposits or other upfront payments.
Key Differences Between Earnest Money and Other Deposits
- Purpose: Earnest money shows intent, while other deposits may cover specific costs.
- Timing: Earnest money is paid early in the process, often upon signing the contract.
- Refundability: Earnest money is refundable if contingencies are met; non-refundable deposits are for specific purposes.