When you buy a home, you must submit earnest money before the transaction. This is just one of many steps involved in a Massachusetts home purchase.
Before you write the check, take some time to learn how earnest money deposits function. This can save time, money and heartbreak down the road.
What is earnest money?
An earnest‑money deposit is a good‑faith payment that shows that the buyer is committed to the transaction. A first deposit is usually submitted with an Offer to Purchase (OTP) and a second, larger deposit is submitted when the Purchase and Sale Agreement is signed. It is essential to understand that the OTP often constitutes a legally binding contract in itself. The earnest funds are typically held in an escrow account and applied to the buyer’s total purchase price at closing.
What are common deposit amounts?
Buyers commonly submit a small initial deposit at the offer stage, often close to 1% of the purchase price. The second deposit at the Purchase and Sale Agreement stage is larger, often ranging from 3-5% of the purchase price or higher in competitive markets. Buyers should confirm the exact amounts before signing because deposit terms are enforceable once accepted.
When can buyers lose or recover deposits?
It depends on compliance with any contingency deadlines and contract terms. Buyers may recover deposits if they:
- Withdraw within a valid inspection contingency
- Fail to obtain financing within the mortgage‑commitment contingency
- Encounter a title defect that the seller cannot resolve
Deposits can be lost if a buyer defaults outside a contingency, misses a required deadline or attempts to back out for reasons not covered by the agreement.
Unfortunately, even small missteps can affect a buyer’s deposit rights. Since Massachusetts often requires attorney involvement, it is beneficial to obtain legal representation at the earliest stage of the process.