Earnest Money – What Is It and Why Is It Important?
The earnest money deposit is an important part of the home buying process.
It tells the seller you’re a committed buyer, and it helps fund your down payment.
Let’s face it, without earnest money, you could make offers on many homes; essentially taking them off the market until you decided which one you liked best. Sellers rarely accept offers without deposits.
Assuming that all goes well and your offer is accepted by the seller, these funds will go toward the down payment and closing costs. In many circumstances, you can get most of your deposit back if you discover something you don’t like about the home.
How Much Should You Put Down in the Earnest Money Deposit?
The amount you’ll pay for the earnest money deposit will depend on a few factors, such as policies and limitations in your state, the current real estate market, and what the seller requires. On average, however, you can expect to hand over 1-2% of the total purchase price as earnest money.
New construction is different. Usually the earnest money deposit will be 3.5% – 5% depending on the Seller.
When Do You Pay the Earnest Money, and Who Holds It?
In most cases, after your offer is accepted and you sign the purchase agreement, you give your earnest money deposit to the title company. In some states, the real estate broker holds the deposit.
Always check the credentials of the firm or broker taking the deposit. Verify that the funds will be held in escrow. Never give the earnest money to the seller; it could be difficult or impossible to get it back if something goes wrong.
After turning over the deposit, the funds are held in an escrow account until the home sale is in the final stages. Once everything is ready, the funds are released from escrow and applied to your down payment.
Can you get your earnest money back?
If the deal falls through, a small cancellation fee is usually taken out of the deposit, but the remainder remains in escrow. Whoever holds the deposit determines whether you should get the money back under the terms of the purchase agreement.
Make sure that the purchase agreement covers how a refund is handled. Keep in mind that even if you are pre-approved for a mortgage loan, you can be declined when you apply for one. In such cases, standard contracts allow you to recover your earnest money deposit. You can also usually get your money back if you find problems with the property.
Sent in by Tom Bonetto, The Lending Coach