What Is Earnest Money in Real Estate and How Much Do You Need
If you've considered buying a home, or have bought a home in the past, then chances are you've heard about earnest money deposits. Often referred to as a "good faith deposit", earnest money is one method to strengthening your offer, especially in a seller's market.
What is an earnest money?
An earnest money deposit signifies your level of commitment to purchasing a home or property. It serves as a form of security deposit to give sellers reassurance if they decide to take their home off the market. An earnest money deposit is separate from a down payment and is paid soon after the seller accepts an offer. It gives the seller some protection, in the form of compensation, if you decide to walk away without a valid and contractual reason. While an earnest money deposit isn't required to purchase a home, it's often seen in most real estate transactions.
This deposit can be applied towards closing costs or the down payment once the sale of the home is completed.
How much earnest money should you pay?
The amount paid is typically either a percentage of the purchase price or a fixed amount. It will usually range between 1-3% of the sale's price. This will vary based on the market you're in. For example, in a seller's market, you may be expected to offer more, whereas in a buyer's market you could potentially offer less - especially for a home needing improvements. When deciding on the amount, it can be beneficial to speak with your real estate agent directly. Whatever you decide, you want to make sure you're not putting yourself at risk financially.If you're using gift money for your earnest money deposit, then speak with your lender about how that could affect your mortgage loan approval. In some circumstances, gift money could require additional paperwork for your lender and a verification of source of funds.
Earnest money funds should never be paid directly to the seller. It's smart to place the money in a third party escrow account where it'll remain until closing. Acceptable payment methods include personal checks, certified checks or wire transfer.
Is earnest money refundable?
There are agreed upon contingencies put into place that protect both the seller and buyer when earnest money is involved. These contingencies could include matters of financing, inspection, appraisals or more. The buyer and seller will sign a contract that defines the conditions of refunding any earnest money.
The seller could keep the deposit if the buyer fails to meet their contractual obligations. Make sure you're meeting any responsibilities and have a full understanding of signed contingencies, otherwise you could risk losing your deposit.
How long does it take to get earnest money back?
Once a real estate transaction falls through, the timeline for getting earnest money back can vary. Typically, the process might take anywhere from a few days to several weeks. This depends on the terms outlined in the purchase agreement and the efficiency of the involved parties, such as the escrow company or real estate agents. Buyers should ensure all conditions for refund, such as contract contingencies, are clearly met to facilitate a timely return. Communication with the escrow holder can provide a more accurate estimate for when the funds will be released.
How does earnest money differ from due diligence?
If you are purchasing a property in North Carolina, it's important to understand the difference between "earnest money" and "due diligence money". Due diligence money is payable when the contract is accepted and is sent directly to the seller via overnight mail or wire transfer. Unlike earnest money, it is not held in a third-party escrow account.
The amount paid as due diligence can range significantly, from a few thousand dollars to much more, depending on the housing market and the property price. In competitive markets, where multiple offers are common, buyers may need to pay higher due diligence fees.
Should the buyer choose to terminate the contract or fail to secure financing, they forfeit their due diligence payment. However, if the purchase is completed, the due diligence amount is credited to the buyer, similar to earnest money. It's crucial to note that due diligence payments are non-refundable.
In conclusion
If you're in the market to buy, then you should consider how earnest money - or due diligence money - could impact your home search and budget. Speak with your lender directly to learn more.