Fairway Mortgage Explains the Purpose of Earnest Money

Submitted to OnFocus – When a buyer enters into a contract on a home purchase, the seller usually takes the home off the market while the transaction moves through the loan process.

If the deal falls through, the seller would then have to re-list the home, resulting in a financial loss for the seller.

“Upon going under contract, a buyer is usually asked to put down an amount of money to show the seller that they are serious about buying the home,” explained Josh Kilty, Fairway Mortgage. “Sometimes called a ‘good faith deposit,’ the money put down first is most commonly known as ‘earnest money’ and usually amounts to 1% – 5% of the home’s sale price.”

Earnest money is not paid directly to the seller, but instead placed in an escrow account. An escrow account serves as a neutral third-party location (generally a real estate agent or title company) where money is deposited per the terms of a contract. The money stays in this escrow account until the home purchase transaction is completed or terminated.

“If the home purchase transaction goes as planned, the earnest money is then applied to the buyer’s closing costs,” said Kilty. “If the deal falls through due to a failed home inspection or other contracted contingencies, the earnest money is refunded to the buyer. If the buyer backs out for any other reason, the seller keeps the earnest money.”

In a competitive market, sellers may favor higher earnest money offers because it shows that the buyers are serious about purchasing their home. A real estate agent will help determine the right amount of earnest money to offer. To learn more about earnest money, contact Fairway at 715-384-7878.

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