UPSC Essentials: One word a day- Earnest Money

Word: Earnest Money

Subject: Economy

What is Earnest Money?

-Earnest money is a deposit made to a seller that represents a buyer’s good faith to buy a home. Simply put, it is a deposit a buyer makes on a home they want to purchase.

– A contract is written up during the exchange of the earnest money that outlines the conditions for refunding the amount.

What is the benefit of Earnest Money?

– The money gives the buyer extra time to get financing and conduct the title search, property appraisal, and inspections before closing.

– The buyer might be able to reclaim the earnest money deposit if something that was specified ahead of time in the contract goes wrong.

Can Earnest Money be returned?

– Earnest money is always returned to the buyer if the seller terminates the deal.

– Earnest money gets returned if something goes wrong during the appraisal that was predetermined in the contract.

– The earnest money would be returned if the house doesn’t appraise for the sales price or the inspection reveals a serious defect. This could include an appraisal price that is lower than the sale price, or if there is a significant flaw with the house.

-But the point to note is that these contingencies must be listed in the contract.

When is earnest money not refundable?

– The seller gets to keep the earnest money or denies to refund it in some cases. For example, if the buyer decides not to go through with the home purchase for contingencies not listed in the contract or if the buyer fails to meet the timeline outlined in the contract.

Point to ponder: What is an escrow deposit? Is there any link between earnest money and escrow deposit?

(source: investopedia.com)