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.
The 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.