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What is an Earnest Money Deposit?

So what is earnest money in a real estate transaction and how does earnest money work?

When signing a real estate contract, it is often expected you submit a deposit with the contract to be held in escrow until closing.  Often the term earnest money deposit, good faith deposit, and escrow money deposit are used synonymously.  They are all referring the deposit you tender with a contract.

The deposit shows you are acting in good faith and you are serious in your intent to buy the sellers home.

How Much?

How much money should you offer as earnest money?  That depends on several factors.

Where you are located in the country, the real estate market you are in and how much you have to offer.  In Massachusetts, a seller is usually expecting a 3-5% of the purchase price for an earnest money deposit with a contract.  It could be less in other parts of the country.

Why Is Earnest Money Important To A Seller?

The earnest money held in escrow binds the buyer to perform on the contract.  Massachusetts contracts state that the deposit is the only damages a seller is entitled to if a buyer does not perform.  A seller cannot sue for specific performance.  

A buyer can easily walk away from a $500 deposit if they find a better house or just change their mind.  But on the other hand, $10,000 deposit is harder to walk away from.  It keeps the buyer in the deal and working in a timely manner so they do not risk their deposit. 

Earnest money is a tool for buyers to help leverage negotiations.  A bigger deposit will be viewed as you are serious.  If you were a seller would you take two offers that had the same offer price but one offered a $1000 and one offered $20,000 earnest money deposit as being equally serious?

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Written by KevnVitali

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