What Does the Term “Earnest Money” Mean When Buying a Home

Have you finally found the home of your dreams? The Napa Valley real estate market is highly competitive, and it’s often the case that other homebuyers also have their eye on the house you’ve chosen. If you want the sellers to take your offer more seriously than other buyers’ and, hopefully, accept your offer, earnest money might come into play.

If you’re unfamiliar with the term “earnest money,” talk to your Napa Valley real estate agent about whether you should use it during your home-buying journey.

What is Earnest Money When Buying a House?

Sometimes referred to as a good faith deposit, you submit “earnest money” to a homeowner to show how committed you are to buying their property. It’s typically paid when you sign a purchase agreement.

When you enter into a purchase agreement with a seller, they must take their house off the market as the transaction moves to closing. If the deal falls through for some reason—such as a mortgage not being approved—the seller must then go through the process of relisting the property. They also may have missed out on other potential buyers during the time the house was off the market. Both can add up to a big financial hit.

Earnest money protects a seller when a buyer must back out for any reason. The amount of money varies, but it’s generally between one and three percent of the home’s sales price. The funds are held in an escrow account until the deal is complete.

Do potential buyers always lose an earnest money deposit? No, if the deal falls through due to something outside the buyer’s control, such as a failed home inspection or higher appraisal, the buyer gets the earnest money back.

Should You Always Pay Earnest Money?

There are several financial issues all buyers must consider when buying a home, including:

  • Saving enough for a down payment.
  • Getting pre-approved for a loan.
  • Estimating monthly expenses, including mortgage payment, insurance, and property taxes.

Because it isn’t always required, earnest money may be a lesser-known expense. But in highly competitive real estate markets like the Napa Valley, it’s a common practice hopeful buyers should factor into their budget. The amount you deposit is then usually applied to the down payment or closing costs.

Talk to a Real Estate Agent About Your Earnest Money Options

If you want to gain an edge on other bidders for a home you truly love, you do have the option of depositing more earnest money than expected to show just how serious and financially stable you are. However, it’s important to keep in mind that if you decide to walk away from the deal simply because you’ve changed your mind, you can lose your earnest money. To understand more about how earnest money works, talk to one of the real estate agents at St. Helena Real Estate today.

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