Earnest Money
Definition of "Earnest money"
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.
Popular Real Estate Terms
Outside wall of a structure that is exposed to the weather. An exterior wall can also be a load bearing wall ...
Provision in a contract that upon a certain occurrence or event the contract is canceled, An example is a contractual term that the written agreement is terminated if one of the party's ...
The accelerated cost recovery system is a depreciation system for tax purposes mandated by the Economic Recovery Tax Act of 1981. In 1986 the Accelerated Cost Recovery System (ACRS) was ...
A special agent in real estate is a real estate agent hired to do a specific task or job, as opposed to a general agent, who is a real estate agent who can do any task he or she is assigned ...
The company is not responsible to a third party if an account or financial instrument is dishonored by the debtor. The creditor's recourse is solely to the debtor's property. An example is ...
Expenditures incurred to initially purchase property, including incidental costs necessary to put the property into existing use and location. This cost is then depreciated over the assets ...
Funds that are retained in an account until a certain event occurs. For example, a downpayment on a contract held until full payment is received whereupon the holding funds are credited to ...
Potential homeowners buy land at a location they like and then build their house on it. ...
Property that is zoned for industrial use, including manufacturing, research and development purposes, factory office and warehouse space, and industrial parks. ...
Have a question or comment?
We're here to help.