If you’re looking into buying a home for the first time, you are likely aware that there are several fees and costs that must be covered over the process of buying a home. One of the first fees you’ll need to have ready when the contract is accepted is called earnest money. What exactly is earnest money, though, and when is it due?
When you submit an earnest money check, it serves as a good faith deposit to the seller. It shows that you are serious about buying this home and that you will honor the real estate purchase contract. At times, your earnest money check can also serve as liquidated damages that the seller keeps in the event that you break contract.
Your earnest money check is due when the contract is accepted by a seller or shortly thereafter, so you should have earnest money available in your checking account before you start to make offers on any homes. This check is usually paid to an impartial third party, such as the title company.
The amount of earnest money you need can vary depending on circumstances. When earnest money doubles as liquidated damages, then the seller gets to keep the earnest money if the buyer doesn’t follow through. This cancels the agreement, but also limits the amount of money the seller can get from the would-be buyer for bailing out. Therefore, it’s safer for a seller if the earnest money deposit is higher. Lower deposits are less risky for buyers. The amount of earnest money needed can vary depending on local customs. Sometimes it can be as low as $500 to $2,000, or somewhere between 1-5% of the purchase. On the higher end, it can be as much as 10%.
Attaching an earnest money check to your offer can show how serious you are as a buyer. It shows that you have the ability to close the deal. If you’re very serious about a purchase and have the money, you can put your entire down payment up as the earnest money. If your offer is accepted, this money will go towards your down payment and closing costs.
It should be noted that there are two types of earnest money: refundable and non-refundable.
If something goes wrong with the transaction that was addressed ahead of time in the contract, then refundable earnest money must be returned to the buyer. For example, if a home inspection reveals a costly flaw or if the house doesn’t appraise for the sales price, that could result in a refund of the earnest money or a re-negotiation. Simply changing your mind, however, is not grounds for a refund. Non-refundable earnest money, on the other hand, is money you can’t get back for any reason, regardless of whether or not you close on the deal.
If you have more questions about the particulars of home buying, you can rely on Stonebridge Mortgage Group to help guide you through the home buying process. We help get you pre-approved for a mortgage and help with your real estate loans and other mortgage solutions, both residential and commercial. We serve the greater Portland area and are in Gresham, Oregon.