Earnest money is more than just a deposit on a home. It is a part of the home buying process that could make the difference between a seller moving forward with the sale of his or her home or backing out of the deal. Before signing a purchase agreement for a home, here is what you need to know about earnest money.  

Earnest Money Is Not a Waste 

One of the biggest misconceptions about earnest money is that it is a waste. Some buyers believe that it is an additional fee or money that will never be recovered. In reality, the money becomes part of the downpayment on the home.  

Most importantly, earnest money can show a seller that you are serious about buying a home. Depending on the amount of the funds, it can help you stand out from others who are bidding on the home.  

The Seller Does Not Hold the Funds 

First-time homebuyers sometimes mistakenly believe that the earnest money goes to the seller and he or she holds it until the sale is closed. In actuality, the money is paid to a title company. Depending on the state in which you live, the funds could be given to the real estate broker.  

Regardless of whether it is a title company or real estate broker that takes the funds, the money will be put into an escrow account. The account is left untouched until the closing of the home sale. The funds are then applied to the down payment for the home you are buying.  

Contingencies Should Be in Your Earnest Money Contract 

The earnest money contract should include several details, including contingencies. The contingencies help to protect your earnest money and give you the right to back out of the purchase agreement, if necessary. There are some standard contingencies that are usually included, but you and your real estate agent can include others that might be necessary.  

For instance, if you currently own a home, you could include a contingency that would allow you to back out of the agreement if your home does not sell. If you are unable to sell your home by a certain date, the contract would allow you to back out of the offer you made on the new home and have your earnest money returned.  

To learn more about your earnest money and other aspects of buying a home, talk to your real estate agent.