When you're ready to buy a home, you'll need to make an offer. If the seller accepts, they will remove the home from the market. But in this situation, the seller is taking on a lot of risks. To balance this out, the seller asks for a deposit, which is called earnest money. This post will explain everything you need to know about earnest money, how it works, and what to expect.

What is Earnest Money?

Earnest money is a deposit that shows good faith to the seller. It ensures that buyers can't easily make multiple offers on different homes and stops them from backing out of the deal without a valid reason. The earnest money deposit is paid into escrow and only goes to the seller if the buyer backs out of the deal without the protection of contingencies.

How Does Earnest Money Work?

When you make an offer on a home, you will also write a check for the earnest money deposit and deliver it to your real estate agent. Your agent will then hold onto it until you go to closing. If everything goes smoothly and you don't back out of the deal, your earnest money deposit will go towards your down payment and closing costs. But if you do back out of the deal, there are a few things that could happen to your earnest money deposit.

For example, if you back out without a valid reason—also known as breaching the contract—the seller can keep your earnest money deposit. Or, if you back out because of something that was wrong with the home that wasn't disclosed in the disclosure documents—like major water damage—then you should get your earnest money deposit back. Lastly, if you can't get financing for the home, you should also be able to get your earnest money deposit back.

Earnest money is an important part of buying a home. It shows good faith to the seller and protects them from buyers who might back out of the deal without a valid reason. If everything goes smoothly, your earnest money deposit will go towards your down payment and closing costs. But if you do need to cancel the purchase contract, there are some circumstances in which you can get your earnest money deposit back.

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