Earnest Money

Once the seller accepts an offer, the buyer and seller are under contract. This means that the two parties are in a legally binding agreement. The next step for the buyer is to pay earnest money.

Earnest money is a portion or percentage of the sales price that is held by a third party in escrow until closing. Earnest money is given to show the full faith of the buyer, that he is “in earnest” in his desire to purchase the property. Thus the seller is obligated to take the house off the market and not accept any other offers. The third party who holds the earnest money varies by state. In some states, it is the title company or settlement company. In other states, the real estate broker holds it.

If the offer is rejected or rescinded because of contingencies listed in the offer, the earnest money is returned. For example, if the property’s inspection shows multiple problems that would take a great deal of money to repair, and the offer was contingent on an inspection, the buyer can withdraw the offer and receive the earnest money back. However, if the buyer backs out for any reason other than those stipulated in the offer, then he forfeits the earnest money to the seller.

Once the sale of the home has concluded, the earnest money is counted towards the purchase price.

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