What Is An Earnest Money Deposit?

An earnest money deposit, also known as a good faith deposit, is a specific dollar amount that a potential buyer pays to the seller in an effort to display their serious interest in a property. It's important to note that an earnest money deposit is not the same as a down payment.

The Purpose Of An Earnest Money Deposit

An earnest money deposit is used to secure a purchase contract, which means the buyer doesn't have to worry about the property being sold out from underneath them. Without an agreement, the seller would be free to sell the home at anytime. An earnest money deposit, however, secures the availability of the home as the potential buyer obtains an inspection, appraisal and financing for the purchase.

How Much Good Faith Is Enough

So, just how much of an earnest money deposit is required? Truthfully, it depends on a number of factors, including the home's purchase price, your location and the standard as set by other sellers. In most cases, the earnest money deposit is negotiable and the seller will be happy in knowing that the potential buyer is serious enough to offer their money in good faith.

How An Earnest Money Deposit Is Used

If the transaction is successful and the buyer follows through with the purchase, an earnest money deposit is most commonly refunded to the buyer or applied to closing costs. If the buyer defaults or is unable to obtain financing, the seller often has the discretion to retain the earnest money deposit as damages or as otherwise described in the purchase agreement.

Using Your Dollars And Sense

When it comes to an earnest money deposit, it's essential that buyers know who should receive the money and how to handle the payment. In most cases, the deposit should be made payable and presented to a licensed real estate broker, an attorney or escrow company. Your REALTOR® can assist in getting your earnest money deposit into the right hands. It's important to obtain a receipt, which should clearly outline the purpose of the deposit. The funds will be handled in accordance with the purchase agreement and/or as agreed upon by both the buyer and seller.

Before handing over a good faith deposit, make sure that you have faith in the person accepting your money. Potential buyers should not give an earnest money deposit directly to the seller, nor should they give it to anyone who claims to be with a brokerage firm unless their credentials are verified.