Definition
An earnest money deposit is a sum of money you give to a seller when you make an offer on a home. It shows you're serious about the purchase and is credited toward your down payment if the sale is completed.
Understanding Earnest Money Deposits
An earnest money deposit comes into play after your offer on a home is accepted. It's like a show of good faith to the seller that you're serious about buying the property. In simple terms, think of it as a temporary down payment. Example: If you agree to buy a house for $200,000, you might put down $2,000 as earnest money. This amount is usually held in escrow until closing. It's not an additional cost, as the deposit typically goes toward your down payment or closing costs. One common misconception is that you lose the earnest money if the deal falls through. It's not always the case; the terms of your contract dictate the conditions for its return.
