As you probably already finding out, buying a home is not an inexpensive process. Buying a home requires more cash up front than most people realize. You have to come up with a down payment and closing costs, for instance, which isn’t exactly cheap! One of the other upfront costs of buying a home is the earnest money deposit that you will most likely be required to put up in order to show the buyer’s good faith in purchasing a home.
What is an earnest money deposit?
Don’t be alarmed or offended if a seller asks you to put down an earnest money deposit when you get serious about buying a home. The earnest money deposit is something like a security deposit. It shows the seller that you are truly interested in purchasing the home. You’re basically putting down a deposit for the seller to hold the property for you. Earnest money protects the seller against buyers who are not completely serious about purchasing their property.
How much is an earnest money deposit?
An earnest money deposit can be quite a nice little chunk of change, depending on several factors. Usually, earnest money deposits will usually be 3% of the purchase price of the home. However, the amount of the earnest money deposit varies from seller to seller, and some may just require a flat amount. Also, earnest money deposit amounts can vary, depending on your state or local real estate market. In high demand real estate markets, for instance, earnest money deposits may be slightly higher than average.
Who gets the earnest money deposit?
As a buyer, you shouldn’t be in too much of a hurry to hand over a check o the seller directly. In fact, that’s a terrible idea! Handing the money directly to the seller could make it difficult to get back, if it comes to that. Instead, earnest money deposits will typically be handed over to the escrow company or settlement and title companies. Having a third party holding onto the money will almost eliminate any possibility of costly and frustrating legal problems in the future.
What happens to the earnest money?
The distribution of an earnest money deposit is typically determined by the purchase agreement. The deposit might be deducted from the purchase price of the property, or it may be applied to the down payment or closing costs. Be sure to speak with a reputable real estate attorney to help you understand exactly how your earnest money will be applied.
Can a buyer get an earnest money deposit back?
In some cases, yes, a buyer may be able to get an earnest money deposit back. If the deal falls through, at no fault of the buyer, most purchase agreements protect the buyer. Most purchase agreements have contingencies stating that a buyer gets the earnest money back in the event that your loan does not go through or you run into trouble with a hoe inspection. Buyers who choose to waive these contingencies, however, as some do in competitive markets, will typically not get their earnest money back if they do not end up buying the house. Buyers can also possibly lose their earnest money deposits if they simply change their mind or drag their feet and go over the closing date outlined in the contract.