The first time you purchase a home, the process can seem overwhelming. It isn't so easy as going to an open house, telling the seller you want to buy their house, and then going to the closing! In order to make an offer to purchase a house binding, it is supposed to be written. When a written offer to purchase (purchase agreement) is given to the seller, it usually includes an "earnest money" check. Buyers question why this is necessary. Essentially, the earnest money check tells the seller you're willing to "put your money where your mouth is" by giving their agent (not the seller) some money to hold in case you get cold feet and back out of the purchase. If the buyer defaults by changing his/her/their mind(s) after contingencies are satisfied, the seller can keep the earnest money as compensation for having the property off the market.
Don't fear, however. Your earnest money is not lost unless you back out of the sale for no legal reason. If the purchase is cancelled based on the inspection or loan denial, the earnest money is refunded to the buyer.
When all goes well with the purchase (which is the usual course of events!), the earnest money is safely held in the listing company's trust account until the day of closing. At the closing, the earnest money is applied as part of the down payment made on the house or toward closing costs. The buyer does not lose their money!
Another common assumption made about the earnest money is that it is not cashed until the closing. Not true! In Minnesota (real estate is local, local, local) the earnest money is required by law to be deposited within 72 hours of acceptance of the purchase agreement. The listing company puts your earnest money in their "trust" account where it stays until the closing or until the purchase agreement is cancelled.
Many first time buyers today buy with no down payment or "zero" down. Earnest money is still collected in a zero down program, but will be applied toward the buyers' closing costs.
A final thought: If you do not have an agent and are buying from a seller that is NOT represented by an agent either, it is wise to have a third party hold the earnest money, i.e. attorney, title company, etc. This is especially true if the buyers and sellers are strangers. Consider this frightening scenario. Buyer A gives the seller a couple thousand dollars in earnest money made out to the seller. Unbeknownst to Buyer A, the seller has collected earnest money from several other buyers as well. When Buyer A tries to recontact the seller, the person that really owns the house was not the person they dealt with but a "house-sitter" for when the real seller was on vacation! The house-sitter is long gone with earnest money from several buyers financing his/her vacation in Tahiti! Does this happen? If you can imagine it, it can!
The protection from this scenario is built in when you use the services of a professional real estate agent!
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