Earnest Money
In a real estate transaction, earnest money or deposit on the contract for sale is made to a home seller or their representative, usually a real estate agent, to secure an offer to buy the property. It is required for the contract to be valid or ratified. The amount of the deposit is up to the buyer, although in some areas or situations, there are expected standards for the amount.
The earnest money is held in escrow by either the seller or the seller’s representative until closing. At the close of the sale, the money is transferred to the closing agent and deducted from the total amount the buyer must have available to complete the sale.
It is recorded on the settlement statement (HUD-1) under Amounts Paid By or In Behalf of the Borrower and subtracted from the Gross Amount Due from Borrower. Therefore, the borrower is credited with having paid that amount toward the purchase in advance of closing.
Should the terms of the contract for sale not be met by the seller, the earnest money deposit is returned to the buyer. If the terms of the contract for sale are not met by the buyer or he decides to withdraw his offer, the earnest deposit is subject to forfeit.