It is crucial to make your home offer stand out in today’s market. You can let the seller know that you are serious about purchasing a house by obtaining a preapproval. You can also put down a deposit as a sign of your seriousness.

This article provides an overview of earnest money, including how you can use it in your favor when purchasing a home as well as how to protect yourself after depositing it.

What is Earnest Money in Real Estate?

To show that you are serious about buying a home, earnest money is paid before the closing. This is also called a good-faith deposit.

If a buyer enters into a agreement of purchase with a seller, the seller removes the property from the market and the transaction proceeds to the closing. The seller will have to start over if the deal fails.

The seller is protected if a buyer cancels. The amount is usually between 1 and 3% of the total sale price, which is kept in an escrow until the transaction is completed. It depends on the customs in your area. If everything goes well, the earnest cash is applied towards the down payment or the closing costs.

The buyer will get their earnest money refunded if the deal fails due to a failed inspection or other contingencies in the contract. Earnest money deposits can reduce the chances of a buyer walking away from multiple offers after the seller has taken the house off the market.

Why should you pay earnest money?

It’s not always necessary to pay earnest money, but you may need it if the real estate market is competitive. These good faith deposits are preferred by sellers who want to make sure that the deal will not fall through. Earnest money is a form of insurance that both parties can use.

Earnest money can also reduce the amount needed at closing, as it is applied directly to down payment and closing costs. You’re essentially putting some money down earlier in the process.

Verified Approval: How it Could Help

If a seller is evaluating multiple offers, they are more likely to favor a buyer who has approved funding. Having earnest money on top can also make your offer standout.

How much earnest money is enough?

How much earnest money to offer will depend on which real estate market you are interested in. If a real estate listing is languishing in a slow-moving market, you may not require as much earnest cash as if there are multiple buyers vying to buy the property. A higher deposit may be necessary if you are planning to buy in an area where bid wars and cash offer are frequent.

You should consult your agent to determine how much earnest cash you should offer. It’s best to not undercut other offers for the same home if you are competing with them. You could lose out to someone who makes a better offer. Your agent will be able to tell you whether a standard good faith deposit is sufficient if the market is slow or moderate.

Is Earnest Money Refundable?

Earnest money is protected by contingencies for both buyer and seller in certain situations.

If you submit an offer to buy a house and the seller accepts it, the sale will only be finalized if certain conditions are met. These are usually listed in the contract and include items such as the appraisal, mortgage approval and inspection.

Home Inspection Contingency

Home Inspection can be a major reason for potential buyers to back out of a deal. A home inspection contingency allows you to cancel the deal if your prospective home has been inspected by professionals and certain elements need repair. You can also negotiate with the seller for the repairs to be made, or to lower the price of the home so that you can make the repairs yourself.

Appraisal Contingency

Appraisal Contingency is also important. It protects the buyer in the event that the property is valued too high. The lender will hire a third party appraiser to assess the value of a home, and compare it with similar properties that are for sale. If the appraised value of the home is less than the purchase price, the buyer can opt to not proceed with the transaction and receive their earnest money. You can also use the appraisal as a tool to negotiate a price increase.

Financing Contingency

Mortgage contingency protects you if your mortgage application is denied. If this contingency is listed in the contract, you can walk away from the deal and receive your earnest deposit back.

Contingency For Selling An Existing Home

Some contracts include a contingency to sell your current home. This contingency allows you to back out of a deal if you cannot sell your current home before closing on a new home.

When To Waive A Contingency

Some buyers may feel pressured to waive contingencies in hot real estate markets. For example, they might do this if are absolutely sure they will qualify for a loan. It’s not a good thing to waive appraisal or inspection conditions. These contingencies exist to protect you.

How to protect your Earnest Deposit

You can protect your earnest cash by taking a few simple steps:

Step One. Use an Escrow Account

Fraud is not a rare occurrence in the real estate industry. You should not give earnest money to a seller or real estate broker. You should instead use a third-party, such as a title or Escrow , to hold your earnest funds.

You can pay with a certified check, a wire transfer or if you’re paying by personal check. You can request and keep a receipt and a copy. Your check must be payable to the third-party. These funds will be held on the escrow until it closes.

Step Two. Know Your Contingencies

You should be aware of all contingencies that protect the buyer and seller. Make sure that you understand the contingencies, and you are comfortable taking any action.

Step Three. Keep Your Responsibilities in Check

The purchase agreement usually includes a schedule of when each aspect must be completed, for example, when you have to get an inspection or the approval date for the mortgage.

The seller may withdraw the offer if you fail to meet the deadlines. The seller will not rescind a contract if they miss the deadline. However, if the delay is too great, this could prove to be a deal-breaker.

Step 4. The Fourth Step is to Put Everything In Writing

Many of us are going to make a large purchase. You should always protect your investment, so you must put all the details in writing. Included in this are any timeline changes and the buyer’s responsibilities. The purchase contract should clearly state who receives the earnest deposit if the agreement is cancelled.

In the event that the inspection is a failure and the buyer gets to keep their earnest money then state this in the contract. So, if the buyer changes his mind and wants to keep the earnest cash from the seller, you should also state that in the contract. The contract should explain everything in full detail.

Bottom line

Earnest money is a way to protect both the buyer and the seller in the event of a problem with the property. A Verified Approval, or earnest money can show a seller you are serious and make your offer standout from others.

Original Blog: https://www.rocketmortgage.com/learn/earnest-money