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What is Earnest Money?

When buying a home, there is no such thing as no money needed, you will likely

need at least a some cash on hand. While there are ways to minimize the cash

you’ll need to put down toward the purchase of a new home, avoiding it altogether

nearly impossible.

One of the things you need to budget for when buying a home is an earnest money

deposit, no matter whether you are buying a new construction home or a resale

property. When someone asks you to hand over a few thousand dollars (often

expressed as a percentage of the home’s selling price), you’ll naturally want to

know where it’s going, why they want it, what happens to it if things fall apart, and

many more questions. Even when you apply for an apartment, you have to pay an

application fee and a rental deposit. Here’s a few common questions and answers

regarding earnest money deposits when buying a home.

The first question that might pop into your head when asked for an earnest money

deposit is: Why do you need it?

When you make an offer to buy a home, you’ll most likely be required to put down a

deposit in the form of earnest money. Home builders may even require that you put

a significant deposit forward, especially if you’ll be making selections for things like

paint colors, floor plan, counter tops, cabinets, etc. Whether for a new construction

home or an existing property, this deposit simply shows that you are serious about

your intent to purchase.

Another question you’ll want to think about ahead of time: How much should I

expect to put down for my earnest money deposit?

The answer to this question can vary for multiple reasons. In a hot market, there’s

more competition from buyers and sellers, so you might find that a higher deposit

can help you win in a competitive market. In most places home buyers are often

expected to put down anywhere from 1% to 3% in earnest money deposits. When it

comes down to it, it’s up to the seller or home builder what they want as a standard.

In some cases, builders will be lenient and require a much smaller deposit,

especially in areas like military communities where living situations can be much

more fluid.

Maybe the most important question in your mind when writing that earnest money

check: Where is this money going and can I get it back if something goes wrong or I

changed my mind?

Naturally, if you are handing over thousands of dollars to someone, you want to

know that your money will be safe, and you certainly question if you will ever see it

again. Let’s look at these three things:

1. Who holds the money? An earnest money deposit is usually held by the title

company who will be processing the home sale transaction from start to finish. In

cases the deposit may be held by a real estate agent or some other third party.

2. Where does my money go when the sale is complete? Your deposit money goes

toward the final purchase of your home. An earnest money deposit is in essence

simply an advance payment toward your final down payment, making the amount

of money needed on the day your home loan closes lower. You don’t necessarily

save any money this way, but it does give you the advantage of spreading out your

down payment.

3. Is there a chance I will lose my earnest money? Yes, there is a small possibility

when you put your earnest money deposit down, you might not get it back if the

sale falls through. This should be outlined in your purchase and sale agreement, so

be sure to read it carefully and ask your agent or builder to go over those terms and

conditions with you. In cases where you lose the sale because of credit issues or

circumstances out of your control, you’ll nearly always get your deposit back

(potentially minus a small processing fee). A new home builder can also make

exceptions, but if it’s not something that covers you in the purchase agreement, it

would be up to the seller’s discretion.

Purchasing a home can be stressful, especially when thinking about how much cash

you’ll be spending to make it happen. Understanding why you’re paying an earnest

money deposit, where it’s going, and how safe of an investment it is can help put

your mind at ease when buying a house.

Reach out and let me get you pre-approved before you go shopping. That way,

you’ll be confident that once you have found your new home, your chances of losing

your earnest deposit won’t be because of something you could control.

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