Most home buyers are aware that they need to make a down payment on a home. However, first time home buyers might be confused about paying earnest money towards a home. Earnest money is paid to the title company when a purchase contract is signed by all parties. This demonstrates that the buyers are serious about the transaction and are backing it up with cash.
Without this, buyers could simply make offers on many homes, essentially taking them off the market until they choose a favorite. Sellers rarely accept offers without earnest money.
There is no set amount for an earnest money deposit, so it’s negotiable. However, in the Austin area, typically it is 1% of the sales price of the home. Assuming the buyer actually purchases the home, the earnest money goes toward the buyer’s down payment and closing costs. However, a buyer can lose earnest money through default, which happens when he or she does not perform according to the terms stipulated in a purchase and sale agreement.
Work carefully with your agent to ensure a clear understanding of all terms and obligations so that you do not lose your earnest money!