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“How Earnest Money Can Help You Buy the Home of Your Dreams” written by Gina Vaynshteyn.
The article discusses the meaning of Earnest Money Deposit when buying a home.
Quote Featured In Apartment Therapy
Generally speaking “it’s kind of like putting a ring on it”. Karen Kostiw of Warburg Realty tells Apartment Therapy, “An earnest money deposit is similar to someone in a deeply loving relationship offering an engagement ring as a declaration of their love, dedication, commitment, and intention to marry.”
Money Deposit
Earnest Money Deposit also is known as a “good faith deposit”; it is a type of security deposit in a real estate transaction. Furthermore, a seller requires an Earnest Money Deposit as a sign of “good faith” from a prospective purchaser. An Earnest Money Deposit is similar to someone in a deeply loving relationship offering an engagement ring as a declaration of their love, dedication, commitment, and intention to marry.
The prospective purchaser provides an Earnest Money Deposit when major negotiations are complete and both parties are confident that a sale will be accomplished. Of course, sometimes items arrive that will result in the sale not moving forward and those provisions defining the means and time-frame of refunding the security deposit are clearing set forth in the contract.
Contingencies
Moreover, to move the sale forward there are contingencies to satisfy. This list below are examples of contingency expectations that may be in a contract:
1. Financing: Providing the buyer the time-frame to ascertain a loan;
2. Appraisal: Ensuring the sales prices meets fair market value;
3. Inspection: The ability to hire experts to evaluate the condition of the home, and
4. Title Search: Reviews the record of ownership to ensure there is no claim of ownership.
If these items listed above are not satisfactory, the Purchaser has the right to receive a refund of the Earnest Money Deposit.
Deposit Amount
The standard convention of the deposit amount is 10% of the purchase price. However, depending on the market and agreed upon term the deposit amount may range between 1% to 50% of the sales price.
Escrow Account
Typically, Earnest Money Deposit is held in an escrow account by the seller’s attorney. And, sits in a segregated and insured account. Additionally at closing the deposit is applied to the buyer’s down payment and closing costs. There are some markets that an independent third party or the title company will hold the deposit.
Return of Deposit
If ultimately a prospective buyer or seller decides not to move forward with a transaction.
- whether as a result of a legitimate reason or
- failure of one or more of the contingencies not being met (as described above).
Then the Earnest Money Deposit must be legally returned. However, if a buyer does not want to close for reasons not allowed and stated in the contract; the seller is entitled to retain the buyer’s deposit. As such, it is vital that both parties are confident in their decisions prior to providing or accepting the Earnest Money Deposit.
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