Earnest money is a good faith deposit made by a buyer, and demonstrates a buyer is serious about purchasing the home. It’s held while the buyer organizes financing and does their inspections and is released on close day and netted against the purchase price.
When is Earnest Money Deposited?
There is usually one deposit made within a few days of a buyer and seller signing the contract. The standard Florida purchase contract defaults to making the deposit within 3 days after all parities have signed. Depending on the circumstances of the purchase, the buyer and seller may negotiate for a second deposit to be made after a period of time or an event such as completing inspections.
Who Holds Earnest Money?
The funds must be held by a third party – not the buyer or seller – in an escrow account. Typically agents will default to making the deposit with the title company doing the closing, it’s saves moving the money to the title company at close. Other common options for holding earnest money are the buyer’s or seller’s real estate brokerage or a law firm.
How Much Is An Earnest Money Deposit?
Here in the Tampa Bay area, earnest money is typically 1-3% of the purchase price, but varies depending on what the parties negotiate. In a hot seller’s market, amounts are typically higher as buyers try to show they are more committed to the property than the competition. A higher deposit amount is one way to make an offer look more attractive.
What Happens to Escrow If the Contract is Terminated?
If a contract is terminated before closing day, earnest money may be returned to the buyer depending on the circumstances and what is written in the contract. Most contracts will have contingencies such as financing, inspections or possibly sale of the buyer’s current home. If the contract is terminated with a contingency, the contract will likely specify that the deposit will be returned to the buyer. If it’s terminated outside of a contingency, such as a buyer getting cold feet and walking away, then it’s likely there is no provision covering return of earnest money and it will be forfeited to the seller. It’s essential that a buyer understand the contract and commitments required, before signing!
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Explore the Buying a Home section of The Property Briefing for practical guidance on financing, inspections, making offers, condos, and the decisions that come before closing.
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