Earnest money, also known as hand money or the good faith deposit, shows the home seller that you earnestly intend to buy his home. A seller promises to deal only with you and can't accept another offer after you deposit earnest money. Therefore, stakes are high for a seller if you aren't serious about buying the home. Home sellers may keep all or part of your deposit if you back out of buying.
Earnest money is the initial deposit into escrow that begins the purchase process. In California, most purchase contracts give buyers three days to deposit earnest money with the escrow holder. The exact amount and due date for the deposit is negotiable and specified in the residential purchase agreement. A typical earnest money deposit equals 1 percent of the purchase price. However, in slower markets, $500 to $1,000 may suffice. A high demand may result in a deposit of at least 2 percent to 3 percent.
Funds in Escrow
Earnest money is refundable, but you might receive a partial refund or no refund under certain circumstances. The seller and third parties may be entitled to all or a portion of the deposit if you fail to meet your contract obligations. The escrow holder controls the funds until close of escrow; however, if the deal falls through, the purchase agreement outlines how the earnest money and refunds are handled. Buyers must ensure that they understand the circumstances under which they forfeit the earnest money deposit before entering into a purchase agreement.
Letting Go of Contingencies
You are entitled to a full refund of the earnest money if you and the seller agree to cancel the deal without incurring any third-party costs that require reimbursement. California homebuyers typically have 21 days to complete all inspections and property investigations, obtain financing and determine whether to move forward with the deal. Sellers usually require buyers to waive the right to an earnest money refund at this point via a contingency removal agreement. When a buyer agrees to move forward without further contingencies to buying the house, he removes contingencies in writing.
Breaking the Contract
A seller can keep your earnest money as liquidated damages when you fail to meet contract conditions. It is difficult to get a full refund of your earnest money after your contingency period expires and you sign a contingency removal. Because third parties have often completed their services by the time you remove contingencies and the seller has lost time and possibly money in trying to meet his contract obligations, you may have to reimburse several parties for their trouble via the earnest money deposit.
- Hemera Technologies/AbleStock.com/Getty Images