5 Things to Know About Earnest Money

Understanding Earnest Money DepositsWhen people start learning about the home buying process, they may quickly realize that buying a home requires proving they are willing to make a commitment. Sellers want to know that buyers are sure they want the house, and they often require an earnest money deposit as a sign of good faith. There are a few rules that buyers should know before they put this money down, however. This information will help Durango buyers determine what to do when they are ready to invest into a particular property, and which scenarios allow them to get their deposit back.

For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.

1. How Much Money Do Buyers Need for an Earnest Money Deposit?

The amount of money that buyers need in the earnest money deposit depends on the list price of the home and the general movement of the local real estate market. In a cool or moderate market, where homes sell but not very quickly and without many offers, sellers might be happy to accept $500-$1,000 as a deposit. Regions with a high cost of living or a tight market may use the deposit as a way to ensure that the buyer is really ready to proceed with the transaction. In this case, buyers can expect to pay as much as 2-3 percent of the list price.

2. What Is the Timing for Offering Earnest Money?

The point of the earnest money deposit is to show the seller that the buyer is willing to invest their own money into the transaction. This means that the deposit must come very early in negotiations. A real estate agent can help buyers determine which amount is best, and many buyers will have that amount ready. Buyers often provide the deposit in the form of a cashier's check once the seller accepts the purchase offer. The contract usually specifies an amount of time for receipt of the deposit, typically a day or two.

3. Where Does the Earnest Money Go During the Sale?

During the sale process, the earnest money is not held by the seller or the buyer. Generally, the seller and buyer will negotiate a third party to hold the deposit in escrow. The third party is typically an organization that is structured to handle these types of transactions, like a title company. In most cases, the funds are deposited and held in the escrow. If something happens prior to closing that requires disbursement of the funds, the third party will arrange for it.

4. Are There Ways Buyers Can Get Earnest Money Back?

Most of the time, buyers should expect that the earnest money deposit is nonrefundable, outside of any conditions they put in the purchase contract. Buyers put contingencies in contracts to help protect their interests in the event that the property fails to meet their initial expectations. Common contingencies include:

Buyers should keep in mind that they have specific deadlines in which they can cancel the contract based on a certain contingency. If they withdraw from the sale after that deadline, they may not be able to get the deposit back.

5. What Happens If the Sale Fails?

There are many reasons that a home sale might fail. Whether or not the buyer gets their earnest money back depends on the contract and the reason the sale could not continue. Although there are obvious cases when a buyer should be able to withdraw based on contingency, like a low appraisal, buyers should remember that getting their money back is not always easy. In instances where there is a dispute over the condition, buyers may need to hire a lawyer to help argue their side.

Buying a home starts with a purchase offer and an earnest money deposit. When buyers understand how it may be used throughout the sale process, they can make an educated choice about their purchase.

For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.

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