What Is Earnest Money and How Much Do You Put Down
I am often asked what earnest money is and why it’s needed in a real estate transaction. I’ll cover the definition of earnest money and the importance of why it’s needed. I’ll also cover how you can risk losing the earnest money, how much a buyer should offer as earnest money and how to improve your offer with the earnest money.
Definition Of Earnest Money
Definition of Earnest money: Earnest money is a deposit made to a home seller indication the buyer’s good faith to perform on the purchase of real estate. Earnest money often comes with contingencies that the buyer has in order to purchase the real property. Earnest money is normally held in a Broker trust account or held by a title company in escrow or an Attorney.
With the purchase contract comes contingencies. The contingencies safeguard the buyer’s earnest money. The most common contingencies can include, buyer due diligence, home inspection, buyer obtaining finial financing and home appraising for or above contract price.
These contingencies come with a deadline when they must be completed by. If the deadlines are met and buyer wishes to pull out of the contract based on their right set forth in the contract, then by contract, full amount of the earnest money will be released to the buyer.
Once the contingencies are done and buyer is satisfied, then the contingencies are released by the timeline indicated in the purchase contract deadlines and the buyer proceeds with the purchase.
If deadlines are passed or other reasons other than the stated contingencies are not met, then the buyer has the risk of losing the earnest money if they choose not to continue with the purchase.
So, the main key to take away from this is, to keep an eye on the timelines and make sure you don’t go pass the deadlines, only if you wish to cancel or re-negotiate the content of the purchase contract.
How much should be offered has earnest money
On average a 1% of the offer price is used has earnest money. Example would be for a $295,000 offer price, the earnest money would be $2,950, based on this approach (295,000 x 1%). I have seen has low has $500 to $1,000 being offered as a deposit. The problem one will run into with this low of an earnest money, specially in a high seller’s market, the seller may not take the offer seriously at such a low risk to the buyer.
In a highly competitive seller’s market where there are multiple offers, the higher one can go with the earnest money the more appealing it will look to the seller. In a multiple offer situation, a buyer may be beat out solely due to the earnest money not be sufficient enough.
In a seller’s market, one of the ways to use the earnest money amount to your advantage is to offer a higher amount than normal or expected. For the example of a $295,000 offer, including a $5,000 earnest money can and will make your offer stand out of the crowd. Sellers will perceive the buyer has being very serious and is willing to put skin in the game and maybe more so than the others.
Another way of making your offer pop with earnest money would be to remove contingency from the contract. You have to really be on your game when doing this. An example of this would be to remove the finical contingency clause.
This type of an offer will defiantly grab the attention of the seller, especially if all other offers have the financial has a contingency to purchase the home. You have to have the confidence when using this approach and the confidence in your mortgage person that the money will be available to you at closing.
Your mortgage person will have to have all supported documents that include; bank statements, pay stubs, full loan application, credit pulled, and more so the mortgage professional can make a solid decision that the buyer can and able to purchase the home at the set approval amount. This will not only give the buyer confidence to purchase, but also will shorten the time to close on the home after going under contract.
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Earnest Money Already Deposited
Having your earnest money already in escrow or in the Broker Trust account before you even start looking will be another advantage. This will give your Agent the capability to inform the seller at the time of the offer that they already have the earnest money and it’s been deposited in escrow or the trust account.
Is The Money Safe?
Earnest money is safe, has long as the timeline of the contingencies are met. The earnest money can be applied to any amount needed for the down payment and /or closing cost at the time of settlement. If no money is needed at that time, then the earnest money is released back to the buyer upon closing of the purchase transaction.
Recap On Key Points
- Go above the normal earnest money standard.
- Have your earnest money cashed and deposited before you start looking.
- Remove contingencies in your offer to make it more compelling to the seller.