Earnest Money

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Definition of 'Earnest Money'

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Earnest money is a good faith deposit that a buyer gives to a seller when they make an offer on a home. The amount of earnest money is typically 1-2% of the purchase price, but it can vary depending on the market. The earnest money is held in an escrow account until the sale closes. If the buyer backs out of the deal, the seller can keep the earnest money. If the seller backs out, they must return the earnest money to the buyer.

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Earnest money serves several purposes. It shows the seller that the buyer is serious about the purchase and that they are financially capable of following through with the deal. It also helps to protect the seller from buyers who may change their minds or try to negotiate a lower price after the offer has been accepted.

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When a buyer makes an offer on a home, they will typically submit a copy of their earnest money check along with the offer. The earnest money check is typically made payable to the seller's real estate agent or attorney. The seller's agent or attorney will then deposit the earnest money into an escrow account.

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Once the sale closes, the earnest money is used to pay for the closing costs. If there are any remaining funds in the escrow account, they are returned to the buyer.

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Earnest money is a valuable tool that can help to protect both buyers and sellers in a real estate transaction. It is important to understand the purpose of earnest money and how it works before you make an offer on a home.

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