Earnest Money in Real Estate Transactions
Earnest means serious or sincere; earnestness is a desirable but rare quality in the parties to discussions about financial transactions. How many entrepreneurs strike up a conversation at happy hour in which they plan to join forces to buy the moon and stars and turn them into luxury condos or a mixed-use district but soon realize that they were looking at the potential business deal through beer goggles? Talk is cheap in business, especially when it comes to real estate transactions. If you doubt this, consider how many “coming soon” signs you have seen outside buildings under renovation or on vacant lots, alluding to projects that never materialized. If you are buying a house to use as your primary residence, you cannot afford to play games, and the seller probably cannot, either. To separate the serious inquiries from the frivolous ones, sellers often require buyers to pay a deposit known as earnest money. The best way to avoid mistakes regarding the payment of earnest money toward a real estate purchase is to contact a Washington, D.C. real estate lawyer.
How Is Earnest Money Different From a Down Payment?
Even though the amount of earnest money is usually calculated as a percentage of the purchase price of the house, it is not a down payment. A down payment is money you pay when you close on the sale, and you pay it to the mortgage lender, not the seller. If you default on your mortgage loan, the bank keeps your down payment.
By contrast, earnest money is a deposit. If the sale goes through, you as the buyer can get the earnest money back or apply it toward your down payment at closing costs. If the sale does not go through, whether the buyer or the seller is entitled to the earnest money depends on why the deal fell apart. Therefore, the earnest money stays in an escrow account until the sale becomes final or the parties end their business relationship without the property changing hands.
How to Protect Yourself Against Losing Your Earnest Money?
Ensuring that the earnest money stays in an escrow account instead of directly to the seller protects you from the seller backing out of the sale and keeping your money. The other most important way to protect yourself from financial losses is to sign a written contract with the seller regarding the earnest money. It should outline the circumstances where the buyer keeps the earnest money and where the seller keeps it. Buyers are usually entitled to keep the earnest money if the sale falls apart for reasons beyond the buyer’s control, such as if the buyer is unable to borrow enough money for a mortgage or is unable to sell his or her old house.
Contact Tobin O’Connor Ewing About Real Estate Transactions
A Washington, D.C. real estate attorney can help you navigate earnest money contracts and other challenging aspects of real estate transactions. Contact Tobin, O’Connor, and Ewing in Washington, D.C. or call 202-362-5900.
Source:
investopedia.com/terms/e/earnest-money.asp#:~:text=The%20good%20news%20for%20buyers,get%20their%20earnest%20money%20back.
