A homebuyer usually provides a seller with earnest money, also called a good faith deposit, when making an offer on real estate. The funds let the seller know the buyer is serious about the property. A substantial deposit is essential in a hot market when the seller might have multiple offers.
This money is set aside in an account and credited to the down payment at closing. If the real estate sale does not close, the cause of the failed deal determines who keeps the earnest money.
Contract contingencies safeguard the buyer
A written offer usually includes contingencies such as the home passing inspection, the appraisal coming in close to the purchase price, and the buyer obtaining financing. If these processes fail, a buyer can back out of the sale and get the earnest money back.
The seller keeps the funds if the buyer backs out
Even if both parties meet all the contingencies in a contract, a buyer may change their mind about the home. If the buyer walks away from the purchase without a justifiable reason, the seller can keep the earnest money.
Deadlines benefit both parties
Most real estate contracts include a timeframe for completion. A buyer has a specific amount of time to obtain an inspection and appraisal, the seller must fix concerns before a deadline, and both parties are responsible for closing the contract on time. If either party fails to meet their deadlines and the agreement falls through, the other can keep the earnest money.
Good faith deposits are essential in home sales. Being aware of what happens to the money if the contract falls through may encourage both parties to do their best to close the deal.