What You Need To Know About Earnest Money

What You Need To Know About Earnest Money
Here’s what you need to know about earnest money in Colorado.

Do you know what earnest money is? It can be a confusing subject, but it’s crucial to understand if you want to purchase a home. Today we want to explain earnest money and what it does for you in a real estate transaction. 

Earnest money is money put down to confirm a contract. This money is held by a third party in escrow until the contract is completed. Once you close on the contract, the earnest money becomes part of the down payment, so the buyer isn't putting up extra funds they wouldn’t have paid otherwise. 

What’s the purpose of an earnest money deposit? An earnest money deposit shows the seller that the buyer is serious about purchasing their home. If the buyer backs out of the contract without good reason, the seller gets to keep your earnest money. Because of this, a large earnest money deposit shows the seller that the buyer plans on following through. 

Colorado is a very buyer-friendly state. There are plenty of opportunities for buyers to leave a contract while keeping their earnest money. For example, during the inspection period, you can terminate the contract based on your opinion of the quality of the home. Since this requirement is so subjective, you can leave during this period for practically any reason. You can also easily terminate a contract based on property insurance or homeowners associations while keeping your earnest money.

“There are plenty of ways for buyers to terminate a contract while keeping their earnest money.”

Traditionally, the earnest money is important because it proves a buyer has the financial stability to put down cash upfront. Plus, it shows that they don’t just plan on walking away at the first opportunity.  However, if it’s so easy for buyers to terminate the contract and retain their earnest money, why should sellers care? One of the other common reasons why people terminate contracts is because of the loan availability deadline. If a buyer’s lender changes their requirements and no longer approves them for a loan, they can once again terminate the contract and retain their earnest money. 

Recently, we’ve been helping a client sell their property, and we found a great buyer offering a great deal. Every sign says they’re serious about purchasing this home, except they didn’t put any earnest money down. We’ve decided to move forward with them anyway since buyers can back out of contracts so easily. If you want to know how this transaction ends up going, just reach out to us, we’d love to chat with you about it. 

If you have questions about earnest money or anything else, please call or email us. We’d love to help!
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