There are many buzzwords when shopping for a home, and “earnest money” is one of them. Like most things, first-time home buyers can be overwhelmed with all of the terms shrouded in mystery.
Earnest money is significant and not too hard to understand at a basic level. We’ll break down how much it is, where it goes, and how to protect the money so that you can feel confident when you make offers and sign contracts.
What is Earnest Money?
Earnest money is sometimes also called an initial deposit or good faith money, It is used during the offer phase to show how serious you are about buying a particular home. It protects the seller if a prospective buyer cannot complete the purchase after the place has been taken off the market. Relisting can be very expensive, so it helps mitigate risk for the seller.
Typically, you should expect earnest money to be 1-3% of the sales price. However, it may increase to 5-10% of the sales price in a hot market. Remember that earnest money is a negotiating tool to make your offer more attractive and that it often is applied towards your mortgage payment at the close of the sale.
Where Does Your Earnest Money Go?
Earnest money is held by a third-party escrow or title agency― don’t ever give it directly to the seller or a mortgage broker. The money will stay in escrow until the closing has been completed. Often the earnest money will then be applied towards your mortgage.
How Do I Protect My Earnest Money?
Several types of contingency (or provisions) protect you and the seller during the buying process. Always have these contingencies in writing, or they will have no legal way to enforce them. Make sure to always follow through on your end of the contingency requirements, or the seller can nullify the contract and pocket the money.
The mortgage contingency protects the seller if you are denied the mortgage required to buy the home after an accepted offer. However, many sellers will only receive offers from pre-approved buyers, so it’s worth getting approved for a mortgage before sending in an offer with earnest money.
Selling Existing Home contingency:
While being a first-time homebuyer is undoubtedly a stressful experience, there are plenty of stressors for those selling a home to buy a new home. This contingency protects the earnest money of a buyer who depends on the sale of their current home to move. If their home sale falls through, they can back out of their potential new home without penalty.
The worst nightmare of any homebuyer is finding significant damages to their dream home after having their offer accepted. It’s an even worse blow if they lose thousands of dollars in earnest money because they didn’t have an inspection contingency. This contingency allows buyers to recover their initial deposit if the home does not pass inspection.
Sometimes home is listed for more than its appraisal value. This situation is a dangerous trap for homebuyers to fall into because if a buyer gets a mortgage for more than the home’s value, they will owe more than the home is worth and lose money on the investment. It is also possible that the lender will not loan you the money anyway since they want to protect their money. Appraisals occur after an offer has been accepted, and earnest money is in escrow. Be sure to have the appraisal contingency in place, so you don’t lose thousands of dollars to a home that is listed for more than it is currently valued.
Need Help? Talk with Anita
There are so many contracts and legalese involved in buying a home– let Anita help you. Anita is a Realtor covering Sonoma County, including beautiful areas like Petaluma, Rohnert Park, and Windsor. She has 13 years of experience and can guide you through everything concerning earnest money. Give her a call today!