Earnest Money

Earnest Money

When you make an offer on a home, you want to show the seller you are serious. That way they will be more likely to accept your offer over other buyers who don’t seem as committed.

One way to do this is by including earnest money in your offer. Also, known as a ‘good faith deposit’, earnest money is an amount of money the buyer puts down to show they are serious about moving forward with the offer.

Read on to find out more about earnest money and how much is enough to show a seller you are serious.

What is Earnest Money?

When a buyer and seller enter a contract, the seller takes the home off the market as the transaction moves forward. If the deal falls through, the seller has to relist the home and start the process all over again. This can result in a major financial hit.

Earnest money can be used by the seller to cover financial damages in these situations.

How Much Earnest Money Should You Pay?

Earnest money is typically 1-5% of the sale price. The amount you end up spending will depend on the real estate market you are buying in to. If the market is slow, you may not need as much earnest money. If the market is hot, a higher amount will make your offer seem more attractive.

Your real estate agent will give you an idea of how much earnest money you should be depositing.

Will I Get My Earnest Money Back?

If the deal goes through successfully, the earnest money is deducted from the down payment or closing costs.

You can also get your money back if the deal falls through due to the seller’s actions. For example, if the house fails the home inspection, the buyer may be able to get their money back.

You can also get your money back if the home’s appraisal reveals the home has been overvalued.

If you weren’t preapproved for your mortgage and you don’t end up getting approved after you put your money down, you may be able to get your earnest money back as long as this contingency was in the agreement.

You may also have a contingency for selling your existing home. This means that if you are unable to sell your home, you can back out of the deal and get your money back. Once again, this contingency would have to be stipulated in the agreement in order for it to be honored.

Protect Your Money

Buyers and Sellers should do what they can to protect their earnest money. Here are some tips:

·        Keep it in an escrow account as opposed to giving it directly to a real estate agent or seller.

·        Be aware of the contingencies so you know what actions you can take if the deal falls through.

·        Stay on track with your closing responsibilities. Missing certain deadlines can cause you to lose your earnest money, and the home.

·        Put everything in writing. Make sure there is a written document in place that states how much money was given, all contingencies that apply and any updates that may have been made along the way.

Earnest money is not necessary, but it is a good way to build trust that you are a serious buyer. Good luck!