You are not alone when you’re confused by real estate jargon. Technical terms like earnest money, option fee, down payment, escrow, and shutting may feel intimidating to the first-time home buyer.
Learning these terms helps avoid misunderstandings throughout the home purchase agreement. What follows here is all the things it’s essential find out about earnest money and an earnest money deposit.
What’s Earnest Money?
Earnest money is used while buying and selling a house. It’s the sum of cash the customer deposits to get into a purchase order agreement with the vendor. It is usually called a “good faith deposit.”
Home purchase starts with a suggestion, normally arranged through the customer and seller’s real estate brokers. Once the vendor is comfortable with the offer, the 2 parties go into a purchase order contract. The client submits a sum of money – the earnest money – as a part of the signing deposit. Amounts can vary, but they’re typically around 1% to 2% of the overall value of the property.
After the 2 parties enter the contract, the vendor takes the property off the marketplace for any latest offer. House closing takes time through inspection, appraisal, and funding. Due to this fact, the earnest money is compensation for the danger if the deal falls through.
What Role Does Earnest Money Play?
Earnest money essentially works as an assurance to the vendor for his consideration of the customer’s offer. It demonstrates the customer is serious about following through with the deal and shows they’re a robust candidate for purchasing the house.
The earnest money is normally not mandatory, but it surely plays an important role within the sellers’ market. It’s due inside three days after the effective date of the acquisition agreement. For those who are buying a house and have a real estate agent, they’ll guide you thru the method and help deliver your check.
A 3rd-party agent, either a title company or an escrow account, will hold the earnest money until closing. It ensures that the party entitled to the money gets it quickly if and when the deal falls apart.
Is Earnest Money Required?
Technically, you possibly can get into the acquisition contract without issuing earnest money. Also, it will not be a requirement to get into a purchase order agreement to buy a house.
Nonetheless, you may be in default when you don’t deposit the earnest money inside the timeframe laid out in the contract. In such cases, the vendor can terminate the agreement.
How Much Earnest Money Should You Put Down?
There is no such thing as a set rule for the earnest money amount. The quantity is extremely negotiable, and sometimes relies on whether it’s a buyer’s market or a seller’s market on the time. Typically, it’s about 1% to three% of the sale price.
It’s in a seller’s best interest to sell their property as soon as possible and get money. As a buyer, the one approach to show that the deal won’t fall through as a consequence of funding issues is thru the speedy delivery of earnest money. The quantity also indicates if the potential buyer has liquid funds to make a purchase order.
Does Earnest Money Go Towards Down Payment?
The earnest money goes to the down payment and shutting cost when the deal goes through. The cash stays at escrow or title company until the closing date. Due to this fact, you possibly can assume it is an element of the down payment.
Who Gets Earnest Money If the Deal Falls Through?
If the contract falls through, it will not be all the time clear who will receive the earnest money. It relies on who caused the deal to falter. If the money is released before closing, or if either side doesn’t follow the contract, things can get tricky. That is why a 3rd party holds the cash through that stage.
If the house appraisal comes back low, the financing agency or lender (banks or financial institutions) will only fund as much as the appraised value (minus down payment). The vendor can have to rearrange for more money, or else they can not close the home. On this case, the customer will not be at fault; due to this fact, the customer claims the earnest money.
In one other situation where the customer backs out of the contract for no reason, they shall be in default. The vendor can terminate the agreement and receive the earnest money as liquidated damages. Similarly, the customer gets the earnest money if the vendor backs out of the deal.
Earnest money is refundable if the customer follows the contract, and it will not be their fault that the deal falls through. The agreement has many stages where the customer gets their a refund without disputing the contract.
Can Seller Refuse the Release of Earnest Money?
The vendor can refuse to release the earnest money if there’s a dispute on who’s at fault for the deal’s fallout. Since a 3rd party holds the cash, buyers do not need access to it.
The title company won’t release earnest money until the 2 parties come to a typical conclusion in writing and terminate the contract.
Methods to Pay Earnest Money?
Earnest money will be paid via various channels, similar to personal checks, bank checks, cashier’s checks, or wire transfers. Since a timely transfer is right, most individuals prefer to drop off the check or go for a wire transfer for quick delivery.
For those who cannot pay by check, a money order is appropriate.
Money will not be acceptable as payment for earnest money. Each parties need to have a paper trail to maintain track of the earnest money payment. Lenders often confirm that the quantity is coming out of your checking account. The lender can disallow unverifiable deposits from being included in closing costs.
Bank cards are also not an appropriate payment method for earnest money. Earnest money and down payment cannot be borrowed funds because they’re unsecured debt.
Methods to Write a Check for Earnest Money?
Writing a check for earnest money is not any different than for every other purpose. Nonetheless, there are just a few stuff you’d need to be mindful.
The check goes to the closing agent, which, typically, is a title company. Due to this fact, the title company’s name needs to be within the blank section for “Pay to the Order of _____ .” It is helpful so as to add the outline under the memo as “earnest money for [address of the property].”
The client will get an earnest money receipt after the title company receives the payment.
Earnest Money Deposit Vs. Down Payment
The earnest money acts more like a buyer’s commitment toward the house purchase, and the title company holds the fund. In contrast, a down payment is a set amount promised to the mortgage lender for securing the financing.
You need not issue the down payment until the closing day. The earnest money have to be given throughout the set date within the contract after it’s signed and before closing.
Option Money Vs. Earnest Money
Although it is not a legally binding requirement, the choice fee is an amount the customer pays to get an option period (mostly ten days) for the home inspection. He can walk out of the deal should the house inspection determine significant repairs or improvements required. The choice amount is comparatively small, starting from $200 to $500. It is normally non-refundable but have to be included within the contract if it goes towards the closing.
Unlike option money or fees, earnest money doesn’t offer you any timeframe to walk out of the deal. Option money protects the customer from getting too tied up within the homeownership decision process, while earnest money protects the vendor if the customer walks away just because he modified his mind.
Earnest money is one in all the essential elements of the house purchase process. The cash ties the customer’s seriousness to the vendor’s assurance. As a buyer, you possibly can get an earnest money refund if issues are found throughout the inspection, low appraisal, or home financing. You possibly can claim this money as a house seller if the customer is at fault.
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Ram is an Engineer by day and a private finance blogger by night. He shares his suggestions and tricks on earning, saving, and growing money through his blog, Dollar for Cent. He uses his analytical and problem-solving skills to tackle money problems, find deals, and increase wealth. He loves his day job but believes our lives mustn’t be location-bound and time-constrained. He documents his financial journey and hopes to succeed in financial freedom.