The logical definition of both words is almost enough to understand what is earnest money. Money is a form of exchange between people to assert value to something and Earnest equals something that shows or results from a sincere and intense conviction.
You see where this is going? The term earnest money – also known as “ good faith money” - is used in real estate to refer to an exchange that shows a sincere intense conviction of both buying a house and selling a home.
Here’s how it comes into play:
When a home buyer and a home seller agree to a fair market value, both parties make a contract to stipulate the final price of the house and the down payment. However, this contract doesn’t obligate the home buyer to purchase the home. Why? Well, the home inspection and the home appraisal may reveal structural problems and he/she will be able to say “hey; with these problems I don’t want to pay that much”. But the contract does obligate the Home Seller to take the house off the market in the meantime, so the earnest money transaction was created as a way to protect both parties: the home buyer can rest assured the home seller won’t be able to hear and accept other offers; whatever they agreed to will be what he/she will pay. And the Home Seller can rest assured that he’s not wasting time, after all the prospective home buyer has put a considerable amount of money on the table; it’s not a crazy ploy from a neighbor who’s also selling a home in order to hold people from making offers and driving them to his/her own house.
Typically, the earnest money is deposited into a trust or an escrow account. And, should something go wrong and the deal falls through, there are some stances where the home buyer will get the earnest money back and some others where the home seller will. If everything goes smoothly the way it should, the earnest money becomes part of the down payment to the house.
Real Estate Tips:
Don’t spend your hard earned earnest money without knowing exactly what you’re doing! Find a real estate agent that will go through the little details we don’t pay attention to amidst all the closing excitement.