Earnest Money Deposits Basics
When you make an offer to purchase a home, it is important to show the seller that you are serious about the deal. This is done in the form of an initial deposit or earnest money deposit.
What Is An Earnest Money Deposit?
A home purchase contract is used to make an offer for a home. The contract includes provisions that describe how you will increase your commitment as you go through the home-buying process.
This commitment begins with an earnest money deposit. It's a deposit that you make in earnest or good faith to your intent.
What Is The Deposit, And When Are They Paid?
Earnest money deposits typically range from 1 to 3 percent of the home's purchase price, depending on the local custom and market conditions. The higher the market pace usually, the lower the Deposit. If you wanted to buy a home worth $300,000., your Deposit would be $3,000-$9,000
These deposits are usually due within three days after the seller and buyer sign a written purchase contract. You can pay them all at once or split them into two phases, as follows:
Phase 1 will usually cost between $1,000 and $5,000, depending on your home price.
Phase 2 will be the balance due following phase 1. If you pay $1,000 for phase 1 and a $300,000.00 purchase price, with a 3 percent deposit, the balance due for phase 2 will be $8,000.
What Are The Deposit Payments?
Deposits can be delivered in one or two parts. They must be sent via wire or cashier's cheque. Personal checks are not accepted.
The seller doesn't hold deposits. Instead, the escrow company, attorney, or lawyer handling the transaction will hold them. Your real estate agent will advise if you are in a state where home purchases can be settled using escrow companies.
Are Lenders Required To Keep Track Of Deposits During Loan Approval?
The loan approval process runs simultaneously with the payment of your Deposit. Your lender will ask you to document all real-time activity in all your bank accounts.
To reconcile your bank statements, online transaction summaries, and wire transfers, your lender will ask you to produce copies of the wire transfer and cashier's checks. They will also request that the escrow company and attorney show proof of funds entering their account.
Can Deposits Be Refunded?
The purchase contract will specify when deposits can be refunded and when they are non-refundable.
Your Deposit may be tied to other provisions in your contract. Therefore, your Deposit can be refunded during your protection or contingency periods. However, if you release certain contingencies, it becomes more difficult to recover the Deposit.
To illustrate, the two-phase deposit example pictured above shows that you may need to release contingencies when you pay phase 2.
Your contract may state that you must release your financing contingent as soon as you pay the second phase of your Deposit. A financing contingency protects your rights for a set period of time while you wait to get approved for your loan.
If you don't get approved for your loan within the time limit, you can cancel the contract and increase your Deposit to receive your original deposit back. If your loan is approved, however, you will need to increase your deposit amount before you can release your financing contingency. If you try to cancel your loan contract due to a problem with the loan, it will be more difficult to recover your Deposit.
Your real estate agent can help you to draft the contract, as well as home purchase offers.
What Is The Importance Of Deposits When You Are Negotiating?
A real estate agent can also help you decide how far you should push to ensure that your offer is accepted. Again, it will depend on the buyer's motivation and the market demand at the time.
Sellers don't consider deposits as important as terms such as down payment size or closing speed. An earnest money deposit requirement below local norms could raise concerns about the seller's commitment and/or strength to buy. As long as you have contingencies that protect you while you secure your loan and inspect the property, you are able to stick to local norms regarding your Deposit.
