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Everything You Need to Know About Earnest Money

What is earnest money?

Earnest money is simply money paid to confirm a contract. It’s money you put down as a good-faith gesture to show the seller you are serious about purchasing their home. Earnest money is different than your down payment, and most times much less. Earnest money is paid right after your offer on a home is accepted. 

How much earnest money should I expect to pay?

In the Tuscaloosa market, earnest money is typically $1,000, but could be as little as $500 or as much as $5,000 for a luxury home. In some markets, earnest money is 1-5 percent of the purchase price. In the hottest markets, like Silicon Valley, sellers may even pay $100,000 in earnest money!

Like most things in a real estate transaction, earnest money is negotiable. Your real estate agent can try and negotiate the amount down, but ultimately is determined by the seller. If it’s a seller’s market like the one we are in now, negotiating down is less likely to work.

What happens to my earnest money if the deal falls through?

Earnest money is deposited into an escrow account with the seller’s broker, title company or escrow company while you wait to close on your home. It is not deposited into the seller’s bank account. This is to protect the funds in case the deal falls through.

Your real estate agent can help protect your earnest money in the case of a deal gone bad by building these contingencies into your contract.

  • The home doesn’t appraise for the offer amount. You offered $250,000 for the home, but the appraiser says it’s only worth $200,000.
  • The home doesn’t pass inspection. You discover problems with the home during the inspection period, and are unable to negotiate repairs to your satisfaction. 
  • Your financing falls through. You were pre-approved for a home loan, but during the closing process something came up and you can no longer obtain a home loan.

Should any of these three things happen, you are entitled to receive your earnest money back. The seller will need to sign an earnest money release.  Discuss these contingencies with your agent before making an offer.

It’s important to note that your contract contains important deadlines. You will have a certain number of days to have the home inspected and appraised. You must respond with your repair requests within the specified time frame. Should you fail to do so and decide to walk away from the purchase, you will forfeit your earnest money.

What happens to my earnest money after closing?

Earnest money is not an additional home buying cost. If the deal goes through, the earnest money will go towards your down payment. So, even if you pay $5,000 in earnest money for a luxury home, it doesn’t make the cost of the home more expensive. 

Have additional questions about earnest money or buying a home? Give us a call at 205-579-8963. We would love to help.

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