You've looked at many Atlanta homes for sale and finally found one that you love. You probably can't wait to get started with the purchasing process. But you have to make an offer to show to make sure the seller takes the house off the market as you work on different closing aspects. Accepting an offer is a big commitment for a seller. If the buyer backs out of the deal, the seller loses a significant amount of money and time finding another buyer. This is where sellers request earnest money. Read on to learn what earnest money is, when to offer it, and steps you can take to protect your upfront investment.

Understanding Earnest Money

Earnest money is a deposit made to a seller as a good-faith gesture that you mean business when it comes to buying the house. It's a way of you showing the seller that you're serious about closing the deal. Sellers tend to favor these deposits because it gives them peace of mind to proceed to the next steps of the transaction. Earnest money doesn't go to the seller right away. Instead, it is held in an escrow account with an escrow company until closing.

Before the deposit is made, a contract is written up to outline the conditions for refunding the money. These conditions, also known as contingencies, are those negotiated between the buyer and the seller. If the home or the seller fails to meet the set contingencies, you can get your earnest money back. However, if you just have a change of heart and decide to back out because of contingencies that are not included in the contract, the seller has the right to keep your earnest money.

To be clear, earnest money deposit is not the same thing as a down payment. It is completely separate, but if everything works out as intended, the amount could be applied directly to your down payment or closing costs.

When to Offer Earnest Money

Earnest money is not obligatory, but it could be necessary if you're buying in a competitive market. You will need to make the deposit within one to two days of the seller accepting your offer.  For this reason, you should have liquid funds when you make an offer. Earnest money can be anywhere from 1-7% of the purchase price, depending on the market, location, home price, and how many offers have been made.

Protecting Your Earnest Money Deposit

The last thing you want to do is put down money and lose it. It pays to be informed when making an offer and submitting your deposit. Here are several things you can do to protect your upfront investment:

• Use an Escrow Account
  The earnest money deposit should never be paid directly to the seller. Instead, it should be payable to a third party such as an escrow company, title company, legal firm, or real estate brokerage. You'll typically pay by wire transfer, personal check, or certified check. Verify that the funds will be deposited into a separately maintained trust account and keep a copy of the receipt.
  
  
• Know Your Contingencies
  Make sure contingencies for inspections and financing are included in the contract. This will protect your deposit if a serious defect is found during inspection or when you can't get financing. It's also important to read, understand, and pay close attention to the fine print. Be sure you're comfortable with the contingencies and understand every scenario where you risk losing your good faith deposit.
  
  
• Abide by the Terms of Your Contract
  The purchase agreement will have a deadline for when every aspect of the closing has to be met, such as when the financing should be approved or the date by which the inspection must be completed. If you don't meet a deadline, you could easily forfeit the earnest money deposit. Make sure you stay on track with your closing responsibilities.

The best way to navigate the earnest money caveats is with the guidance of a trusted real estate professional. Our real estate agents will help any questions and negotiate favorable contingencies. We will make sure everything goes right. Contact us today to learn more.