July 14th, 2019 9:49 AM by Jackie A. Graves, President
is earnest money? Depositing earnest money is an important part of the home-buying process. It tells the real estate seller you're in
earnest as a buyer, and it helps fund your down payment. The earnest money check is typically
cashed and held in a title company trust account, or in the broker's escrow
account. You get a receipt from your brokerage when you hand in the earnest
requirement of earnest money, a real estate buyer could make offers on many homes, essentially taking them off the
market until they decided which one they liked best. Sellers rarely accept
offers without the buyers putting down earnest money to show that they are
serious and are making the offer in good faith.
all goes well and the buyer's good-faith offer is accepted by the seller, the
earnest money funds go toward the down payment and closing costs. In effect, earnest money is just paying more of
the down payment and closing costs upfront. In many circumstances, buyers can
get most of the earnest money back if they discover something they don't like
about the home.
you'll deposit as earnest money will depend on factors such as policies and
limitations in your state, the current market, what your real estate agent
recommends, and what the seller requires. On average, however, you can expect
to hand over 1% to 2% of the total home purchase price.
In some real
estate markets, you may end up putting down more or less than the average
amount. In a market where homes aren't selling quickly, the listing agent may
note that the seller requires only 1% or less for the earnest money
deposit. In markets where demand is high, the seller may ask for a
higher deposit, perhaps as much as 2% to 3%. Your real estate agent may
recommend that you are more likely to win a bid if you give the seller a large
deposit. In fact, the seller may be willing to negotiate on the purchase price
a little if you make a bigger good-faith deposit.
On the other
hand, you may not want to put too much earnest money down. Coming up with that
much money, and losing the use of it for weeks or months before the sales
contract closes, may not be the best use of your cash.
may wind up having to do some paperwork for your mortgage lender, and
the bank may want to verify the source of the funds for larger deposits of
earnest money. It won't be a problem if you can show that you've had the money
for at least 60 days.
cases, after your offer is accepted and you sign the real estate purchase
agreement, the contract stipulates that you give your deposit to the title
company. In some states, the real estate broker holds the deposit.
the credentials of the title company or real estate broker taking the deposit,
and 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
over the deposit, the buyer's 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.
If the deal
falls through, a small cancellation fee is usually taken out of your earnest
money deposit, but the remainder remains in escrow. Whoever holds the deposit
determines whether you should get the earnest money back under the terms of the
purchase and sale contract. Make sure that the purchase agreement covers
how an earnest money deposit refund is handled.
To be on the
safe side, make sure the purchase agreement contains contingency addendums that
stipulate how a refund is handled (e.g., an inspection contingency protects the
buyer if the real estate fails a home inspection). Buyers can also usually get
their earnest money back if they find problems with the property, or if they
are unable to get title insurance.
contingency ensures that the earnest money is refundable and the buyer can get
out of the transaction if he cannot get financing. Keep in mind that a
pre-approval from a lender does not guarantee a borrower can get a loan at
mortgage rates he can afford. Even if a buyer has a good credit score and is pre-approved for a mortgage loan,
the lender can still turn him down based on unforeseen factors such as
the appraisal amount being too low. In such cases, a standard contingency
allows buyers to renegotiate the purchase contract, or get their money back.
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