Congrats! You just submitted an offer on your dream home, and it was ACCEPTED! Now they’re asking you to drop off earnest money which has you going, “uhhhhh, what’s that?”
Earnest money is a deposit made by the buyer that shows they have good faith in purchasing the home. The deposit amount can vary, but typically it is about 1-5% of the purchase price. The exact amount will be spelled out in the contract.
The buyer deposits Earnest Money by personal check, certified or cashier’s check, or a wire transfer (BUT beware of wire fraud). BUT don’t head over to the seller’s house quite yet to deposit a check – the deposit isn’t paid directly to the seller. Nope, the buyer will need to deposit the check into an escrow account, *cue Pioneer Title Agency. *
Pioneer Title Agency acts as a neutral third party and holds the funds in escrow. These funds remain in escrow until the details are negotiated, the home purchase is finalized, and the parties agree to any contingencies. From there, all that is left is the closing process.
The earnest deposit can be credited towards any closing costs associated with completing the sale.
Why is Earnest Money Required?
Sellers typically require an earnest money deposit. This deposit is their way to know you are serious about purchasing the home. James McGrath, a licensed real estate broker, explained, “Earnest money is simply a way to make the buyer have skin in the game. Without it, after a contract is signed, the buyer could walk away without penalty.”
Earnest money also protects the seller should the contract fall through under the circumstances not covered by a contingency. The money would go to the seller, and they could use that to cover the costs of having the home off the market and having to re-list.
Earnest money can also be used to the buyer’s advantage. It can be used to provide a competitive edge to your offer. If you find yourself in a bidding war, offering a larger earnest deposit could sway the seller towards you. While you are offering more money, in the long run, it comes back to you at the closing table.
If you plan to purchase a home soon, be prepared to have an earnest money deposit. This deposit will show you are serious about purchasing.
Pioneer Title Agency is a full service company with an operating philosophy of "Commitment to Service." The company provides title insurance, escrow, account servicing, trustee sales, as well as builder related trust services through more than 70 offices in Arizona.