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  • Zachary Epps

What is Earnest Money and How Does it Work?

In today's competitive real estate market, it's crucial that your offer stands out from the crowd. Possessing a pre approval letter from a lender is just one example of how to demonstrate your seriousness to a seller. An alternative is to make a down payment called "earnest money" or "initial" payment. Nonetheless, earnest money is not the same as a down payment. This article will tell you what earnest money is and how it works.


What is earnest money?

Put simply, earnest money is a deposit made to the seller to show that the buyer is serious about closing on a purchase, such as a house. Thanks to this cash down payment, the buyer will have more time to secure financing and complete other pre-closing tasks, such as a title search, property appraisal, and inspections. Purchasing a property before having it inspected or appraised is a bad idea.


However, the seller must be incentivized to withdraw the property from sale in order to avoid missing out on potential offers. After all, the buyer's mortgage commitment is still at risk despite a successful inspection and appraisal. The buyer’s earnest money demonstrates the buyer's dedication to closing the real estate purchase with the vendor. Earnest money is used as security for the seller, so the buyer can't just back out of the deal at the last minute.



How does earnest money work?

When a seller accepts an offer, they typically pull their property from sale until the deal closes, which can take several weeks. Typically, the buyer and seller exchange deposits or earnest money upon signing the purchase agreement or sales contract. However, there are circumstances in which the payment may be made when the offer is made. What you pay will vary depending on the market conditions and local customs where you make your purchase.

A home purchase contract is used when a buyer offers a property. The terms of the agreement are structured so that the buyer's level of commitment to the sale increases as various milestones are reached. The deposit of earnest money signifies the beginning of the commitment.


Safeguarding your earnest money

Getting your money back after depositing it as earnest money can be tricky. You can use a neutral third party, like a title or escrow company, to hold your earnest money.

Also, make sure there must be a written contract between you and the seller. This eliminates any room for doubt and establishes the order of precedence for the various clauses in the agreement.


Buying a home in Boulder, CO?

Home buying is a significant financial commitment. You must ensure you're getting the best deal possible while staying safe.

Talk to me today about earnest money, how it works, and how to make the best home offers if you're a first-time buyer or otherwise unfamiliar with real estate.


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