Earnest money is a good faith deposit made by a buyer that is held in an escrow account during the course of a real estate transaction. Also known as hand money, these funds ensure that the buyer is serious about the purchase and gives the seller a bit of security when taking his home off the market. Earnest money deposits are held until the time of closing, when the amount given is credited towards the purchase of the home.
Although an earnest money deposit can go towards the closing costs of a home, it can also be credited towards a number of fees associated with home buying, such as the down payment or escrow fees. Basically the amount is applied toward whatever is required to be paid. A borrower with a zero-down loan will most likely have their earnest money credited towards the closing costs.
The amount you put down as an earnest money deposit may dictate how the money is credited at closing. For example, buyers with a 3 percent down payment who only deposit $500 in earnest money may find that none of the earnest money is credited to their closing costs. Conversely, buyers who deposit several thousand dollars in earnest money and have a zero-down loan may have most of the earnest money applied to closing costs and possibly even get a refund at closing due to an excess in the escrow account.
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At closing, the escrow agent will prepare a HUD-1 Settlement Statement, which will list all of the debits and credits for both the buyer and seller. The earnest money deposit will be listed as a credit to the buyer, while any other funds owed will be listed as debits. The closing agent will add up all of the debits and credits for the buyer to get a final amount of funds required at closing. This is the method used to apply the earnest money properly.
Once a real estate contract has been mutually accepted and the earnest money has been deposited into escrow, there are only certain circumstances that will allow you to get your earnest money back if the sale falls through. These safety net clauses in a contract are known as contingency clauses, and will allow you to get an earnest money refund due to reasons such as a failed loan, a negative inspection report, or trouble obtaining homeowner's insurance. Check your contract details or ask your real estate agent prior to writing the offer if you are concerned about losing your money.
- Real Estate ABC: Real Estate And Mortgage Insights: The Earnest Money Deposit
- Realtor.com: Understanding The Earnest Money Deposit
- Realtor.com: What Is Earnest Money And How Does It Work?
- US Department of Housing and Urban Development: HUD-1 Settlement Sheet
- US Department of Housing and Urban Development: III Your Settlement Costs