Earnest Money Deposits: A First Time Homebuyer's Guide

If you are in the market for a new home, undoubtedly you have been saving up money for your down payment. What many new homebuyers aren't prepared for is their earnest money payment. This guide will prepare you for everything that is involved in making an earnest money deposit.

What is earnest money? Earnest money is a deposit given on an offer to purchase a home. It is effectively a pledge to the seller that you intend to follow through on the deal. Earnest money makes your offer more attractive because it is not refundable should you back out of the contract, and therefore gives the seller some assurance that you won't.

Earnest money deposits are not legally required on a home purchase, but are the general rule. Usually, the money is exchanged at the time you make the offer on a home. If the offer is accepted, the funds will not be available to the seller immediately, but are kept in a broker's account until closing. At closing, the earnest money is normally credited towards the purchase price of the home. If the offer isn't accepted, the funds would be returned to the buyer.

Assuming the offer has been accepted and the earnest money deposit paid, you should be aware that there are legal stipulations which govern what happens to the money should the closing not go through. If there were contingencies stated in the contract that were not met and that would release the buyer from the contract, this would be cause for the earnest money to be returned to the buyer. In this case, the broker would require consent of both the seller and the buyer before the funds would be returned. If the closing doesn't happen simply because you, the buyer, have changed your mind and do not want to purchase the home anymore, you would forfeit the earnest money deposit. If there is a dispute about who is entitled to the earnest money, a broker can only release the funds through a court order. Oftentimes, these disputes are settled in small claims court where the judge will decide who the rightful owner of the deposit is. Be aware that there is a statute of limitations for filing these claims. Alternatively, some Boards of Realtors have earnest money arbitration programs for settling these types of disputes. A decision from the board takes the place of a court order and is enough for the broker to release the funds to the rightful owner.

A good rule of thumb is to only make an offer on a home you truly want and make sure you get a thorough home inspection. Work with a Realtor you trust who can guide you through the home buying process, and more than likely it will be a smooth and painless process.