Earnest Money: Why is it Important in Real Estate?

A Guide to Understanding the Importance of Earnest Money

In a housing market that is competitive, like the one in Nashville, TN, making an offer that will stand out among the others is going to be vital for homebuyers. Prospective buyers may offer more than the asking price, such as a larger downpayment, and waive contingencies to make their offer appear more attractive. How does earnest money factor into all of this?

In this article, we will discuss an understanding of the importance of earnest money in the world of real estate.

What is Earnest Money?

Earnest money is also known in the world of real estate as a faith deposit, a sum that you put down to show a commitment to buying a home. It will provide the seller with protection and assurance if the buyer should opt to back out of the purchase. This type of fund is held usually in an escrow account until the closing, and buyers typically send their good faith deposit via wire transfer, a personal check, or a certified check.

Is it Required to Put Down Earnest Money?

Making an earnest money deposit is not always required, but in more recent years, it has become a standard process in real estate and transactions. This is true if you plan to purchase a home in a competitive market. If you should submit an offer without earnest money, the seller can request a counteroffer.

Earnest Money Vs. Down Payment

Earnest money shouldn't be confused with a down payment, the initial sum that is paid toward the purchase of your home. Your earnest money can go toward the down payment, a larger sum of money when the sale is finalized.

Importance of Earnest Money in Real Estate

Earnest money has two purposes: protecting the seller and making a buyer's offer look more attractive. If a seller accepts your offer and you go into a purchase agreement, they will take the home off the market. If you should back out for whatever personal reason, the seller will relist the property and start the process over. This is both costly and time-consuming. When putting down an earnest money deposit, you are showing the seller that you have committed to going through with the sale of the house. The seller will likely keep the funds if you change your mind for reasons outside of pre-agreed stipulations.

What is the Appropriate Amount of Earnest Money to Offer?

Earnest money is anywhere between 1% to 3% of the sale price. While a larger good faith deposit will demonstrate a significant commitment to purchase a home, some factors can influence the competitiveness of your offer.

How to Manage Earnest Money Deposits

After both parties have agreed on the terms of a home sale, the real estate purchase agreement will outline the specifications of how the buyer's earnest money deposit will be managed. This will include where the funds will be held and conditions in which the buyer's good faith deposit can be forfeited or refunded. The agreement might also specify deadlines and disclosures or contingencies that have to be met to finalize the deal. Make sure to work closely with your real estate agent if you have questions about how your earnest money is being managed.

What Happens to the Earnest Money if the Deal Falls Through?

Depending on the agreed-upon contingencies established in the purchase agreement, typically, if the buyer backs out of the sale for a reason that breaches the contract, the earnest money will be refunded. If not, the seller is within bounds to keep the money.

Tips on Protecting Earnest Money

• The Purchase Agreement Needs to be Clear. Include all the stipulations and contingencies that have to be met to purchase the home.
• Work closely with a Trusted Real Estate Agent. Putting earnest money down is a big deal. Having an expert on your side who can talk you through the process and answer questions will make the task all the less jarring.
• Ensure Financing and the Mortgage Preapproval is Properly Done. Your home financing should be secure, and it is important to get a mortgage pre-approval before making an earnest money deposit. If you submit an earnest money deposit without a home loan being secured, you can easily lose the deposit if the sale falls through.

Bottom Line

Purchasing a home is a big investment, and the earnest money you are responsible for paying upfront will show the seller how committed you are to the transaction. This is why homebuyers need to choose to get pre-approved for a home loan early in the home search process. Opt to work closely with a real estate professional to aid you in the many different processes of the sale and purchase of a home. Trust the real estate professionals at Benchmark Realty to guide you in finding and settling down in the home of your dreams in the many beautiful urban neighborhoods that make up Nashville, TN, today.