When you buy or sell a home in Midland, you’ll hear the term earnest money – but what does it mean, how much is it, and what happens to it when your transaction is completed?

Here’s what you need to know.

What is Earnest Money?

Earnest money is a deposit – sometimes also called a good faith deposit – that a buyer provides when he or she wants to buy a house. It’s a sign of good faith that the buyer is actually going to purchase the home.

An earnest money deposit is the buyer’s own money – not part of the mortgage loan – and it’s designed to say, “Look, I’m really putting my money where my mouth is.”

How Much is an Earnest Money Deposit?

You can put down as much of an earnest money deposit as you want, but on average, you can expect to show the seller between 2 and 5 percent of a home’s sales price. If you’re buying a $200,000 home, you can expect to show the seller between $4,000 and $10,000 of your own cash.

You don’t actually give the money to the seller, though. Instead, you give your real estate agent a cashier’s check. Your agent puts the cashier’s check in escrow, where it sits until the transaction closes.

Related: What is escrow in a real estate transaction?

What Happens to an Earnest Money Deposit When the Transaction is Complete?

When your transaction closes, the earnest money could go in a couple of places. It can go toward the buyer’s down payment, the first month’s mortgage payment or closing costs.

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