Simply put, earnest money is a form of collateral paid by a buyer as a early deposit to show intent and good faith to a seller for taking the seller’s home off the market while the buyer does their due diligence on inspection of the property and arranging financing if needed. In the Seattle area earnest money deposits are generally, 1-3% of the purchase price of the home, although buyer and seller can come to any agreement on amount. Earnest money is negotiable. In the current “seller’s” market its not uncommon to see earnest money deposits of 5% (or more) offered by competitive home buyers.
Again, the reason for providing earnest money is to show that the buyer is serious in their commitment to purchase the property. Earnest money deposits are usually made immediately upon mutual acceptance of an agreement and held in a trust or escrow account until the transaction is finalized.
At mutual acceptance the property is taken off the market by the seller to allow time for buyer to inspect the home before closing the sale. If the buyer is also financing the purchase the buyer will need to secure a mortgage and the lender of the loan will want to appraise the property.
If the sale goes through, the earnest money is typically applied towards buyer’s closing costs and down payment due at closing. If the sale does not go through, the buyer may or may not be able to reclaim their earnest money, depending on the phrasing of the sale contract. Backing out for reasons covered in the contract (failed contingencies such as unfavorable discovery from inspection being a common reason) will likely allow the buyer to reclaim their earnest money, while backing out for reasons not covered will generally forfeit the good faith deposit.
If you have a question about earnest money or Seattle real estate in general please contact me. I’m always happy to answer your questions.