All About Earnest Money Deposits
Earnest money is a deposit paid on a real estate sales contract to confirm the offer. An earnest money deposit is made to reassure the seller about the buyer’s commitment to follow through on a sales contract. The earnest money deposit is a critical part of the home buying process since sales contracts are rarely accepted without one.
How Much You Can Expect to Pay
Earnest money varies from region to region. Typically an earnest money deposit will range from $1,000 or up to 3% of the sales price. The earnest money amount will be negotiated and agreed upon on the sales contract.
Some factors that can affect the amount of earnest money required are:
- The state of the real estate market
- What the seller requires
- State laws that require certain amounts
If the real estate market is currently a seller’s market, you may need to put down more earnest money to make your offer more appealing. On the other hand, if the market is working in the buyer’s favor you may put down as little as $1,000. A seller may request a certain amount of money while negotiating the sales contract to protect their interest. Also, some states have legal guidelines regarding earnest money deposits.
What Happens With the Earnest Money Deposit?
After your sales contract has been accepted and the purchase agreement has been signed you will make an earnest money deposit to the title company. After turning over the earnest money deposit it will be held in an escrow account until closing. At the time of closing the earnest money deposit will either be applied toward the downpayment or closing costs or will be returned to the buyer.
How to Protect Your Earnest Money Deposit
Many buyers are nervous about making an earnest money deposit because of potential situations that can make a purchase contract fall through. In the event that a sales contract is terminated, there is usually a small cancellation fee that will be taken out of the earnest money deposit. The title company will review the sales contract to determine whether or not you’ll be refunded your earnest money.
Here are some additional ways to protect your earnest money deposit:
- Never give your earnest money deposit directly to the seller.
- Make your earnest money deposit payable to a reputable third party such as a well know real estate brokerage, escrow or title company or a legal firm.
- Verify that the earnest money will be deposited into a trust account.
- Get a receipt of the deposit.
- Make sure the purchase agreement covers how a refund will be handled if the contract falls through.
You should also include several contingencies on the sales contract to protect your earnest money. The most commonly used contingencies are on the appraisal, the home inspection, financing, and selling your current home. These items are also the most common reason for a contract to be cancelled.
Ultimately, the earnest money deposit serves a purpose to protect both the buyer and the seller. The buyer can show their commitment to purchasing a property, and the sellers can feel assured that the buyers won’t back out without valid reasoning. Utilize the appropriate professionals to make earnest money one small part of the home buying process.