Earnest money is a small deposit, usually 1% of the purchase price of the home. Earnest money is posted to show the seller that the buyer intends to perform the terms and promises made in the purchase contract.
The earnest money is applied towards the purchase of the home at closing. For example, if a home were selling for $200,000 - the earnest money would probably be $2,000.
At closing, the $200,000 purchase price is paid by the buyer. Usually, the vast majority of this is financed. For example, if the loan will take care of $192,000, then the buyer would need to bring $8,000 cash to closing. The earnest money would be applied against the $8,000, leaving $6,000 to be paid at closing.
There are many terms built into the contract where the earnest money can be returned to the buyer without any penalties, as long as the buyer provides the required notice to the seller. For example, the inspection period allows for the buyer to leave the contract, and have his earnest money returned, if he finds problems with the property. Of course, the buyer can also try to work with the seller to come to agreement on any problems, and move forward, but if buyer and seller do not come to agreement, the contract terminates and the earnest money is returned. (The form to use for either situation is called the inspection notice)
Another example would be property insurance objection deadline. If the buyer were unable to find property insurance at an affordable rate (it happens sometimes, especially for water issues and past claims) then they would be able to terminate the contract and receive their earnest money back.
There are some instances where the buyer can LOSE their earnest money. For example, if the buyer did not leave the contract under the provisions that allow for the buyer to leave, and did not close, there is a good chance his earnest money could be lost. It is important for the buyer to be aware of the deadlines in the contract, and meet them, or provide the required notice that they are unable to meet them. Usually this notice needs to be in writing, and should contain the wording in the contract.
When earnest money is lost to the seller, usually the listing agreement between the seller and their agent indicates the earnest money is shared evenly between the seller and their agent.
If you find yourself in a potential earnest money problem, the best advice of all is to seek legal counsel as soon as possible. I am not legal counsel.
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