If you’re like many sellers, you may be willing to take a little less money if you feel confident that your buyer is serious about purchasing your home. One way buyers can indicate just how serious they are is by offering earnest money. Let’s take a look at what earnest money is, how it works and what it means to your sale.
What is earnest money?
The simplest way to describe earnest money is to say that it’s a good faith deposit provided by the buyer, showing that they are earnest (serious) about buying the home. Typically, earnest money is 1%-3% of the asking price of the home. If a buyer really wants to assert their seriousness, they can offer as much as 10%.
Who gets earnest money?
Instead of simply writing a check to the seller, earnest money actually goes into a special account that is overseen by an attorney until closing. If a sale falls through prior to closing, it’s up the the attorney to decide what happens to the money. There is almost always a small cancellation fee charged to the buyer, but the disbursement of remaining funds will depend on what caused the sale to dissolve and whether or not there were earnest money contingencies in the original offer.
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Is earnest money a down payment?
Although earnest money may seem like it’s functioning a lot like a down payment, this is actually not it’s purpose. It’s just a tool buyers can use to instill confidence in a seller when they put in their offer. If the buyer knows a seller has multiple offers on the home, they can put in a larger earnest money bid as a way to try to get dibs on acceptance. At closing, earnest money goes towards the buyer’s mortgage and closing costs.
What does earnest money mean to a seller?
When a seller is offered earnest money along with a fair offer for their home, they often make the decision to take their home off the market so that they can move forward with the sale as quickly as possible. Essentially it means both parties are serious and ready to move the sale forward as quickly as possible.
Are there alternatives to earnest money?
Buyers who qualify for a home loan that doesn’t require a down payment, like a VA loan, will sometimes have difficulty coming up with earnest money. These buyers have an option to offer a promissory note instead of an earnest money deposit. A promissory note simply a signed document from the buyer to the seller stating their intent to buy. Sellers sometimes accept promissory note offers, but it’s a riskier move because there is no cash to back them up.
Now that you understand the role earnest money plays in a home sale, you’ll be better prepared to evaluate buyer offers.
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