When buying a house, earnest money is a good faith deposit to the seller showing the buyer’s intention of buying the home. Earnest money is usually delivered when the purchase agreement is signed, but you can also attach it to the offer if there are a lot of potential buyers, an earnest money deposit attached to the offer may help your offer be the one the seller chooses. It can give the buyer a little extra time to secure their financing, get the property appraised and inspected, and conduct the property search. The funds are usually held in an escrow account until closing when the earnest money is then applied to the down payment and closing costs.

How Much Should I Deposit?

In most areas, the earnest money deposit is usually between one and 10 percent of the sales price on the home. In some areas, instead of a percentage of the purchase amount, there is a fixed amount for the earnest money. Some areas, like Silicon Valley, can have six-figure earnest money deposits. Discuss your earnest money deposit with your real estate agent to help you determine how much you should deposit in earnest money.

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Is Earnest Money Refundable?

If something that was specified in the agreement goes wrong, it can be refundable, but it is not always refundable. This is largely dependent on if you include contingencies in the purchase agreement.

If the appraisal value on the home is less than the offer amount, you are likely able to get the money back. If the house does not pass inspection, you may be able to get it back, especially if there is some significant damage and you cannot work out an agreement with the seller for repairs. Your financing falling through is another thing that can get the money returned.

Make sure you meet every deadline in the purchase agreement, and if there is something that may take longer than anticipated, have a new date renegotiated into the contract as soon as you can. Not meeting the deadlines means the seller can keep the earnest money even if the sale does not go through. However, if the seller has a change of heart and backs out, the buyer is always refunded the earnest money.

The reason the seller gets to keep the money if the buyer backs away is that taking the house off the market while the sale is processed, so they may be taking a financial hit if the deal falls through and they have to start this up again.

When putting the purchase agreement together, make sure that who gets the earnest money under each condition, so there is no question if something comes up later.

Do I Have To Pay Earnest Money?

No, an earnest money deposit is not required to buy the house, but if you are in a competitive market, it can help show you are serious about buying the house. It is essentially an insurance deposit, there to protect both buyer and seller for if the sale falls through.

However, a seller may choose to require an earnest money deposit, for their own piece of mind. This is fairly common, so it is important to keep this in mind when buying a house.

Where Do I Make The Earnest Money Deposit?

The earnest money is given to a third party, like an escrow company or a title company; they will hold the money safely for you. Usually, you pay by a wire transfer, certified check, or a personal check, which is made out to the third party that will be holding the deposit. Make sure you get a receipt for the deposit. Never give your earnest money deposit to the seller directly.

Todd Wilkinson is the Founder and Owner of FonHome Realty.  FonHome is a customer-centric brokerage where our clients are in control and our experienced agents are respected for providing the positive and exciting experience the real estate transaction should be. Todd is an accomplished real estate investor with an undergraduate degree in Financial Economics and a Masters’s degree in Business Administration.  Todd has held senior management and executive-level positions with the world’s two largest retailers and a successful startup venture.  Todd has served terms on the University of Arkansas Advisory Board and is actively involved with the St. Theresa School in Kenilworth.  Todd opened his own brokerage after feeling underserved in his personal experiences with real estate transactions and wanted a firm whose mission was on serving the fiduciary responsibilities guaranteed to the Buyer and Seller.  Contact Todd today for a free Comparable Market Analysis for your home or for advice on beginning your search for a new home at www.fonhomerealty.com.

 



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