If you’re ready to buy a home, you should prepare to have an earnest money deposit. This can be an extremely important part of the homebuying process as it essentially lets a home seller know how serious you are as a buyer. So, what is earnest money?
An earnest money deposit, otherwise known as a good faith deposit, is a sum of money that you pay to the seller to let them know you are ‘earnest’ and will follow through on the contract. It is the closest thing to being able to ‘put your money where your mouth is.’ The money doesn’t go directly to the seller but will be held in escrow or a trust by a third-party who holds all finances during the transaction until the sale is finalized and complete. Once the sale is complete, the deposit will go towards your down payment or closing costs, so no additional money is necessary.
The amount of earnest money is not a set amount and will vary based on the market. Typically, it is about 1-3% of the purchase price of the home, but it ultimately depends on the seller. In a buyer’s market you can expect to put down a smaller deposit, however, in a seller’s market you could be going up against multiple bids so a larger deposit will likely be required. If desired, you can try to negotiate the amount down.
You can receive your earnest money back if the sale doesn’t go through, but it depends on why it didn’t. If you have the right contingencies, or conditions, in the contract and the seller doesn’t meet them, you can get your money back. For example, if the seller agreed that the home appraisal will match the sale price, but it comes back lower, you can back out of the deal. If you decide that you no longer are interested in the house or if you fail to meet the timeline specified in the contract, the seller has the right to keep your money. That’s why it is so important you’re completely serious and ready to purchase the home when you submit the deposit.
To learn more about earnest money, contact one of our licensed Mortgage Loan Originators. If you are ready to begin the home buying process, click here to get started!