What is Earnest Money?

In a perfect world, once you found the home of your dreams, you and the owner could sign a purchase agreement, shake hands and follow with your down payment. However, in the real world, once the ink dries on your signature you will need to put money on the table to show that your intent to purchase is “earnest” or in good faith.

canstockphoto6409107The earnest money is usually deposited in the form of a personal or certified check issued to the real-estate brokerage. They require a fraction of your down payment for the earnest deposit. The deposit will then be held in an escrow account until the buyer and seller complete closing.

Many factors determine the various earnest payment amounts. The attractiveness of the sales price, the level of others interested in the home and how quickly a buyer can move from contract to closing all influence the sum a seller requests for an earnest money deposit. If everything goes as planned and the sale moves forward, your earnest money deposit applies toward the down payment.

Now that we know more about earnest money we can address some frequently asked questions.

Just how much should I pay?
Industry experts recommend that earnest money deposits remain between three to five percent of the purchase contract. Although, others argue that two percent should be the maximum. Some sellers require a flat rate without considering a percentage. Each state sets their own legal limits on the amount of earnest money allowed. Avoid paying too much and talk with a realtor today to find out the requirements in your area.

How is the deposit made?
In most markets, you aren’t required to the pay entire deposit at once. At signing, the buyer issues a check for a fraction of the deposit often ranging between $1,000 and $5,000. The remaining of the earnest deposit will then to be paid within one week to an escrow account as previously explained above.

If something goes wrong, am I out of luck?

Most purchase agreements and contracts stipulate that the seller keeps the earnest money deposit if a buyer fails to complete the purchase. Due in part to the fact the seller may face the loss of time and money due to a buyers default on the contract. Although, sometimes the seller and buyer can find a fair solution on how to distribute the earnest money deposit between them. Best case scenario the seller forfeits his claim on the deposit and returns it to the buyer minus a subtracted fee for the brokerage. Worst case scenario, you should be prepared to write the money off as a penalty for causing the seller some form of hardship.

How To Go On A Vacation While Saving For A Down Payment

Summer is a popular time to take vacation, but what do you do if you’re trying to save for a down payment? To give you some ideas and help you save up for your first home, here are 6 ideas for saving up for your home.

canstockphoto13028436Stay-cation. This year, instead of taking an expensive vacation, or spending a lot of money on airfare and a hotel, why not do something closer to home? There are a lot of beautiful National Parks around us that aren’t a ton of money, hiking trails, and other local attractions to explore. In addition, Groupon is an excellent site where you can get deals on fun events and activities going on in your area.

Rent negotiations. If you’re a good tenant, you may be able to negotiate on your rent with your landlord to lower your rent while you save for a home. If this approach isn’t working, consider downsizing to a cheaper apartment which allows you to put more money into savings.

Reduce monthly expenses. When was the last time to checked your car insurance, renter’s insurance, and other major monthly expenses? By looking at these expenses, along with your cable, cell phone, and health insurance bills, you may be able to lower your expenses by changing plans or negotiating on terms to help save you hundreds or thousands of dollars.

Cut down on luxury or non-essential items. If you find yourself spending money on luxury items such as manicures, spa visits, and other non-essential items, make it a point to cut them out of your life (or enjoy these a little less often). To help you stay motivated and remind yourself why you’re doing this, hang a picture of your dream home on your fridge. This way, you can stay true to your goal of homeownership.

Spend less on entertainment. Instead of splurging on going out to movies or out to eat, find ways to limit this expense. Eat in and rent a movie from Redbox or stream something from Netflix. Another idea, hold a date night with your spouse by cooking a meal you haven’t tried before or making it a game night. You can do this even when you’re on vacation. Instead of going out to eat all the time, why not pack a lunch for the day or avoid wasting money on checking out tourist traps (or pick just one to do) and instead talk to locals on what fun, free things they’d recommend. This could be fun to also explore the area and get to know the locals better.

Pay off your credit cards. If you’re carrying credit card debit, make it a point to pay this off. Not only does this look good when applying for a home loan, but by paying off your credit cards you’ll save money on not paying the high interest fees and can apply more of that money towards your savings. To pay off your debt, try using the snowball method which focuses on paying the smaller debt off first and then moving on to the bigger ones. By doing this, according to the snowball method, will help build momentum and get your debt paid off faster.

What are some things you’ve done when saving up for your first home? Share them with us below in the comments.