If you have never been through the home-buying process, some of the terminology can seem a bit foreign. One of the many phrases you might come across is earnest money.
When making an offer on a home, it is often encouraged to include earnest money with the offer. Earnest money is a payment of 1-5% of the offer price which is intended to show the seller you are really interested in their property. The amount is not set in stone and it usually depends on the market. In Massachusetts, the deposit is split between the initial deposit and at the signing of the Purchase and Sale Agreement. So how is this money used?
These funds are held in a designated escrow account by the listing agency or the seller’s attorney. When you make it to closing, the earnest money will be directed towards any closing costs, down payments, or other items you would typically pay out of pocket. It is treated as a credit toward any expenses that come up in the process, and is in no way a bribe for the seller.
There are a few situations where your earnest money will be refunded if you don’t make it to close. This usually requires a stipulation or clause to be added to your offer, and those can vary. Financing not going through, the seller not being able to close, and an unacceptable home inspection are all reasons which, if you are protected in your contract, you should receive your earnest money back. If you do decide to back out of the contract with no real reason other than changing your mind, the seller may be able to keep the earnest money.
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