Once you have found a home and your offer has been excepted the next step in the process is submitting your earnest money. Earnest money, or “good faith deposit”, is a portion of money you put down upfront to demonstrate your seriousness in purchasing the home. In most cases, earnest money acts as a deposit on the property you’re looking to buy. You deliver the amount when signing the purchase agreement or the sales contract. Depositing earnest money is one of the most important steps in the home-buying process. It tells the seller you’re an earnest buyer, and it helps fund your down payment.
The amount of earnest money you offer is often based on the market and the condition of the house. If the market is hot and the home you want is in a prime location with bidding wars and cash offers, you can expect a higher earnest amount. In most markets, the average deposit is between 1% and 5% of the home’s purchase price.
The earnest money check is different than the downpayment. It is typically cashed and held in a title company trust account, or the broker’s escrow account. You typically receive a receipt from your brokerage when you hand in the earnest money.
Assuming that all goes well with inspections, appraisals, and lender reviews, the earnest money funds go toward the down payment and your closing costs. In effect, the earnest money is just paying more of the down payment and closing costs upfront.
Interested in learning more about some of the steps that happen after your offer is accepted and your earnest money deposited? Check out this blog regarding appraisals and this one on home inspections.
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