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Earnest Money - Definition & Advantages of Earnest Money | What is Earnest Money?

Earnest Money is a small deposit. The interested home or property buyers pay it as a token to sellers. It indicates that the buyer is willing to buy the property. If the buyer does not win the property bid, a refund is given to them. For convincing sellers, people often use earnest money. 

What is Earnest Money?

Earnest Money or ‘token amount’ is given before purchasing a property. This term is most commonly used in the real estate industry. The amount is paid to the seller as a small deposit. It assures the seller that you have an interest in the property. People also give earnest money while doing large transactions too. 

After giving the deposit, buyers get time to plan the overall investment. Buyers can check their finances before buying the property. They get the chance to do a proper evaluation of their investment. It also pushes the seller to go ahead with the offer. The status of the property changes from listing to under contract. 

The token amount falls somewhere between 1-3% of the total value of the property. It goes into the escrow account. It means the fund stays with the third party till the closure of the agreement. Once the deal is final, the deposit turns into a down payment. 

Earnest money is also applicable to Government and private projects. Here, sellers use the terms like Tender Security or Bid Bond.

Advantages of Earnest Money

The benefit of earnest money is for both buyers and sellers.

It helps sellers to find serious offers. If the deposit is large, sellers can stand out in the competitive market. It helps sellers choose the right buyers. If the buyer backs out, the seller has the money to meet the losses. It happens with respect to conditions mentioned in the agreement. 

Earnest money helps buyers in getting extra time to evaluate their finances. They can do a proper inspection before finalising the deal. A buyer can also cancel the contract and get a refund if something goes wrong. The refund is based upon conditions as per the agreement.

Conclusion 

Earnest money works like a security deposit for both buyer and seller. Buyers can walk out if something is wrong with the home. Sellers can find buyers who are interested in buying the property