Earnest Money

What is Earnest Money?

Earnest money is a type of deposit that is made to a seller and generally demonstrates the good intention of a buyer to purchase a home. This amount of money provides extra time to the buyer so as to finance the rest of the amount, conduct property appraisal, title search and inspections before closing the deal.

In several ways, the earnest money is also regarded as a deposit on a home or an escrow deposit.

Explaining Earnest Money

In several situations, the earnest money is paid when the purchase agreement or sales contract is signed. Once deposited, typically, the amount is held in the escrow account until the closing of the deal. And then, the deposit can be applied to the closing costs or the down payment made by the buyer.

Also, when a buyer decides to buy a home, both the parties have to complete the contract. However, this contract doesn’t restrict the buyer to purchase the house as inspections, and home appraisal reports may bring issues regarding the home in the limelight.

But the contract helps to reassure that the seller takes down the property from the Market until it gets appraised and inspected. To prove that the buyer is actually interested in purchasing the property, the earnest money deposit is made.

Furthermore, in case something goes wrong with the purchase, the buyer may claim this money back. For example, the earnest money gets returned if the house is not appraised for the price of sales, or even if the inspection reveals certain defects. However, in most scenarios, the earnest money remains non-refundable.

Earnest Money Example

Now, suppose that you are ready to purchase a home from your friend which costs Rs. 10,00,000. To make the transaction seamless, the broker will be arranging Rs. 10,000 as a deposit made to the escrow account.

The earnest money agreement signed by both you and your friend states that your friend, who is currently living in that house, must vacate it by the next three months. However, if your friend is unable to find any other residing place in these three months, you can cancel the transaction and get the deposit back.

Now, from the escrow account, the deposit money has got Rs. 500 as interest. Thus, you can choose to cancel the agreement and take out the entire money. On the other hand, if you are still interested in buying the house, you can continue with the agreement. Finally, the deposit money will get deducted from the final amount of Rs. 10,00,000.