What is Earnest Money?
Earnest money is the price you pay to take a property off the market. If you’re a renter, it’s customary to offer one month’s rent as earnest money. If you’re buying a home in Chicago, the amount varies, but can be as high as 10% of the purchase price for a new construction home.
In the event that the deal goes through, it is applied to your purchase price. For home buyers, this means that the earnest money may well be more than your down payment. You’ll get it back at closing.
If the deal falls through, you lose the earnest money. This means that you’d better be really sure that you want to commit to the place before you put that money down. (In fact, that’s why buyers customarily request a chance for an attorney to review their offer before they put down all of their earnest money.)
Basically, it’s a ransom that you pay while the seller or landlord holds hostage your ability to shop around for other properties. By taking a property off the market, they’re in turn forfeiting the right to potential better offers that might come along while they wait for your deal to close. (more…)