You’ve found a home you really like and you’re going to make an offer. Your offer will need to include a deposit called “earnest money.”
Earnest money is intended to show the seller that you’re “earnest” about the purchase, meaning sincere and truly committed. Without a monetary commitment and potential loss of deposit for not following through on your offer, the purchase contract isn’t worth much to the seller.
A Few Contingencies
A contract to purchase will typically say it is contingent upon securing financing and on the home passing an inspection. Your earnest money deposit goes into an escrow account while your financing is being arranged and the home inspector evaluates the condition of the property. Most contracts specify a reasonable deadline for you to secure financing. Your earnest money will later be applied to the home purchase.
How much earnest money will I need to put down?
Depending on the price of the home and in a slower market, $500 to $1000 may be enough. In a very active market, earnest money can be as much as 1-3 percent of the sale price. For an upper bracket home, it can be as much as 10 percent. Ask your real estate agent how much earnest money is customary in your area for the type of home you’re buying.
Offer Now Pending
When a seller accepts an offer, the listing is then designated as “offer pending.” Further marketing efforts, like open houses, are suspended. Most of the time, an “offer pending” designation on a listing will discourage buyers who may have been interested, so now the home is essentially “off the market.”
Why is earnest money needed? Can’t I just make an offer?
Earnest money serves as compensation to the seller should you change your mind. The seller has lost time on market for his home. Without a good-faith deposit, a buyer could put offers on multiple homes at the same time to see which can be purchased at the best price. Earnest money is really about making a commitment.
Will I get your money back if the deal doesn’t go through?
It depends. If there’s a problem with securing financing or a significant issue is found during the home inspection that can’t be repaired or renegotiated in the price, you will likely get your money back. But if your financing commitment or home inspection is taking far too long—well beyond the stated deadline in the contract, it’s unlikely your deposit will be returned.
If you change your mind about the property and back out of your offer to purchase, the seller will certainly have a case for keeping the money. So, before you offer to buy a home, make sure it is really the one you want and check the contract you are signing for specifications.
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