An earnest money deposit is sometimes called simply earnest money or a good faith deposit. It is a certain amount of money that a buyer will put down to demonstrate their intent in purchasing the property. In most cases, an earnest money deposit acts as a deposit on the property. It is either refunded to the buyer or more commonly goes towards closing costs or the buyers’ down payment. Essentially the earnest money deposit may increase the chance of the buyer to close a property.
Typically the earnest money deposit amount is much less than the minimum required down payment amount. Usually, the amount ranges between 1% to 2% of the property’s purchase price. The earnest money deposit in many cases is non-refundable. This means if the buyer backs out of the deal, the seller may keep the deposit. This is unless there is a legal agreement in place that contains a refund clause. An earnest money deposit may also be refunded in some cases where a property fails inspections.
Many confuse the terms earnest money deposit and down payment as they are similar but not quite the same. While the earnest money deposit can eventually go towards the down payment, the purpose of the two is different. The earnest money deposit serves as a promise to the seller that the buyer will buy the property. A down payment serves as a promise to the mortgage lender who is providing the home loan.
In certain market conditions, such as a “hot” local real estate market, earnest money deposits become more common.