The Real Estate Encyclopedia
What Is Earnest Money And What Happens If I Decide Not To Buy The Property?
Category - Home Buying Questions - Search & Offer FAQ's

Earnest money is the cash deposit paid by the prospective buyer showing his/her good faith intention to complete the transaction.  This deposit can also be called bargain money, caution money, hand money or a binder in some states.  The earnest money check typically is made out to the buyer’s broker, is held in a special trust account until the closing and a copy of same is submitted to the seller with the purchase agreement.  The amount of earnest money is usually not more than 10 percent of the purchase price and its primary purpose is as a source of payment for losses suffered by the seller should the buyer default.  Earnest money is not essential to make an agreement binding if the buyer and seller agree.

 

Until the buyer’s offer is accepted by the seller, the earnest money belongs to the buyer.  Buyer should be entitled to a refund of the earnest money if a) both parties fail to enter into a binding agreement, b) failure of any contingency to which the contract is subject, c) termination of the agreement due to default by the seller, d) termination of the agreement based on any right to terminate clause set forth in the agreement or e) upon the closing of the property.  If the purchase contract survives through closing, any earnest money paid by the buyer is considered toward the down payment or other expenses carried by the buyer.   The seller is entitled to the earnest money if the agreement is terminated due to the default by buyer.  Should a contract be terminated and both buyer and seller claim a right to the earnest money, the issue is typically resolved legally.  In that case, the broker holding the money may interplead the earnest money into a court of competent jurisdiction. 

 
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Home Buying Questions - Search & Offer FAQ's
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