In this article, you will know more about earnest money, how it works and how much you’ll need to put down.
When you find a home and enter into a purchase contract, the seller can withdraw the house from the market.
Earnest money is the amount of money you are down to demonstrate how serious you are when you want to buy a house.
In some cases, earnest money acts like a deposit in the property you are looking to buy. Moreover, when you deliver the amount when signing the purchase agreement or sales contract.
However, it can be part of the offer. The seller and buyer sign the contract that defines the conditions of refunding earnest money.
READ MORE: Earnest Money: What It Is and How Much It Is in Real Estate
What Is Earnest Money?
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Earnest money is the payment made ahead also it is called a deposit that demonstrates your intent to get a home. When you pay the earnest money, you will show that you add serious about the home purchase.
“At closing, the earnest money deposit will be credited toward the buyer’s purchase of the home” by Lee Hunt, the senior loan originator with Motto Mortgage Simplified in Aiken, South Carolina.
How Does Earnest Money Work?
The purpose of the earnest money deposit is to show the seller that the buyer is serious about their offer. Also, it makes the seller know that the buyer intends to comply with the terms of the purchase and sale agreement.
In some cases, you’ll need to deposit the earnest money within a day or two after your offer is accepted. Furthermore, the funds are then held by the real estate brokerage in the escrow account when the seller works to finalize the deal.
How Much Earnest Money Should a Homebuyer Pay?
The amount of earnest money you offer is different determining on the market and the condition of the house.
Maybe you want your house to be in a location prone to bidding wars and cash offers that you will have to offer a considerable amount.
Moreover, the low earnest money deposit will be suitable for the fixer-upper in the slow market. Commonly in the real estate markets, the average good faith deposit is between 1% and 3% of the property’s purchase price.
This can be the high 10% for highly competitive homes with multiple interested buyers. Sellers prefer to fixed amounts that will help filter out buyers that are not serious.
However, the best way to determine the reasonable earnest money amount is to talk to a real estate agent that is experienced. As they’ll assess the property and market-specific factors and quote the figure within the standard range.
When you are losing the good faith deposit is unlikely, the offer amount that the seller will appreciate without putting yourself at financial risk.
Is Earnest Money Refundable?
Contrary to common belief, homebuyers don’t always forfeit their earnest money to the seller when the deal fails. The buyer gets their good faith deposit back when the seller terminates the home sale without a valid reason.
You can also reclaim your money when the reason for contract cancellation is the contingency outlined in your purchase contract.
Examples of known real estate deal breakers include:
- If the home inspection reveals severe housing defects.
- When the appraisal amount is known then the home sale price as the seller won’t re-negotiate the sales price.
- When the homebuyer can’t secure the financing.
Also, when the buyer is unable to sell their current home before closing on the new one. It is important to understand potential contract contingencies, to be sure to go over the contract with your real estate agent.
READ MORE: What Is Earnest Money and How Much Should You Pay?
When Do You Lose Earnest Money?
There are times when homebuyers lose their earnest money after the broken deal.
Two scenarios that can lead to the forfeiture of your good faith deposit are:
● Waiving Your Contingencies
Financing and inspection contingencies protect your earnest money when your mortgage doesn’t go through or the house is beyond repair. However, when you waive either contingency, you forfeit your good faith deposit if the house doesn’t go to sale.
● Ignoring Contract Timelines
Home purchase contracts often have timelines within which the buyer has completed the purchase process. Moreover, the failure to close the transaction on the agreed date means you have breached the contract. You may have to forfeit your good faith deposit.
How To Protect Your Earnest Money Deposit
The following are the measures to protect your earnest money from fraud:
1. Put Everything in Writing
Make sure your contract clearly defines what amounts to cancel the sale and who ends up with the earnest money.
2. Use An Escrow Account
To avoid trust issues don’t give your earnest money directly to the real estate seller or broker. Also, the manager will be a reputable third party like the escrow company, legal firm, title company or renowned brokerage firm. Make sure the funds are in the escrow account and obtain a receipt.
3. Understand The Contingencies
Makes sure that the contingencies protect your interest in the contract. Importantly, you shouldn’t sign a home purchase agreement that doesn’t have the clauses that protect you.
4. Meet Your Responsibilities
Real purchase agreements usually set deadlines to protect sellers. Be sure to respond to the questions and provide the documents requested as well as meet inspection, appraisal, and closing deadlines to avoid breaching the contract.
READ MORE: What is an earnest money deposit?
Conclusion
When the buyer and seller enter into an agreement to transfer ownership right of the property, the buyer will be required to deposit earnest money into your escrow account. There’re many reasons the buyer and seller can agree to where the buyer can back out the agreement.
