6 Things To Know About Your Earnest Money Deposit

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When you’ve found the house of your dreams and you’re ready to make an offer, putting down a good faith deposit (also called earnest money) lets everyone know you’re on the same page and ready to do business. It lets the seller know you’re serious about their property and signals the start of the purchase process.

A good faith deposit usually goes into a trust or escrow account held jointly by the seller and the buyer. Sound like a commitment? It is—but it’s a relatively small one, with limitations that protect both you and the seller.

1. Earnest money is not an additional cost or money down the drain. Think of your good faith deposit as an advance on the sale. If the sale goes through as planned, your good faith deposit will fold into your down payment. And putting earnest money on the table can give you a little breathing room to finish getting your financing in order.

2. Sellers rarely accept offers without a good faith deposit. If the sale process didn’t require a good faith deposit, potential buyers could make as many offers on as many homes as they liked while they mulled over their choices. While that sounds great for buyers, that would essentially take the home off the market while the buyers debated the merits of the home—not feasible for a seller who needs to attract interest and offers.

3. The typical good faith deposit is 1% to 3% of the home’s purchase price. Factors that influence how much your good faith deposit will be include regulations in your state, how demanding your local real estate market is, and the seller’s preferences. And just like a larger-than-expected offer, a large good faith deposit can sometimes tip the odds in your favor if your seller is seeing a lot of interest in their home.

4. Your lender may want to verify the source of your earnest money. Lenders want to know that this money really does belong to you and accurately represents your ability to fund a home purchase. You should be able to show that the money has been in your accounts for at least 60 days.

5. When a sale falls through, you may or may not get your good faith deposit back. If things don’t work out, the good faith deposit generally goes to whichever party was not responsible for pulling out of the deal—you, if the seller backs out, or the seller if you retract your offer. You will usually get your deposit back if your lender declines your financing or if the home inspection turns up any problems. A nominal cancellation fee is usually deducted in either case.

6. Never give your good faith money directly to a seller. Make sure your money is going into an escrow account and that the firm or broker handling it is properly credentialed. Don’t deal directly with a seller; you’ll have no protections and no way of getting back your money if the deal doesn’t go through.

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Posted in: Mortgages & Home Buying
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