Everything There is to Know About the Earnest Money Deposit

Things Everyone Needs to Know About the Earnest Money DepositWhen buying a home, Oakland homebuyers may need to put down an earnest money deposit to clearly show their intent to buy the property. This helps strengthen the offer by showing that the buyer has every intention to make the purchase if given the chance. The deposit also helps give homebuyers a little bit more time to smooth out the details, such as appraisals, home inspections, and repairs. But, to move forward with confidence, it is important to learn all there is to know about the earnest money deposit. Use this guide to get started.

For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.

Earnest Money Deposits Vary

It is up to the seller to determine just how much the homebuyers must pay as an earnest money deposit. The total amount due usually ranges between one and five percent of the purchase price of the home. When the market favors the seller, earnest money deposit amounts tend to rise with the competition. If the market turns to favor homebuyers, however, required deposit amounts decrease.

The Deposit is Typically Nonrefundable

As they are a representation of the good faith of the homebuyer, earnest money deposits are typically nonrefundable. If the buyer backs out for any reason, the seller can usually keep the deposit. This helps compensate the seller for their time and missed opportunities in selling the property to an interested buyer. Homebuyers do have the option to add contingencies to the terms, giving them a way out in the right circumstances.

Contingencies Can Provide Protections

Contingencies offer homebuyers a way to get back their earnest money deposit when unforeseen circumstances prevent them from completing the purchase. The contingencies can protect homebuyers when:

  • They cannot acquire adequate financing
  • The property fails to pass the initial or subsequent inspections
  • The title search reveals unsatisfactory information

Homebuyers must spell out these terms in full in the contract to have them honored. Otherwise, the seller can keep the earnest money deposit, no matter what occurs.

Deadlines Matter, Though Adjustments are Possible

Homebuyers need to pay close attention to their contract deadlines or their contingencies may not hold up. If they are coming up on the deadline, they may renegotiate the contract, though the seller can insist on the existing deadline. If that happens, and the buyer cannot close by that date, they will lose their earnest money and the opportunity to purchase the property.

Title Companies and Real Estate Brokers Can Hold Earnest Money

When it comes time to pay the earnest money deposit, homebuyers do not send it directly to the seller. Instead, a neutral third party, such as a real estate broker or title company, holds the deposit until the property closes or the sale falls through. They will then distribute the funds as indicated in the contract and according to the situation at hand. The only time the homebuyer will receive the funds back is if the situation exactly matches the contingencies in the contract.

Earnest Money Deposits Must Be Paid Upon Offer Acceptance

Homebuyers do not have to put down earnest money deposits every time they send an offer to a seller. They only have to pay the amount due to the title company or broker when the seller accepts their offer. Upon acceptance, homebuyers will be given a certain amount of time to get their deposit paid in full.

Once they send in their deposit, the seller cannot accept any other offers on their property. They must wait for the homebuyer to complete the purchase or back out before the deposit money is released. If the homebuyers back out, and do not have contingencies on the contract, then the seller gets the deposit. Then, they are free to accept another offer and try the sale over again.

With an understanding of the earnest money deposit, homebuyers can meet the seller's terms and buy the property of their dreams. Otherwise, missteps in the process could result in a loss of those funds and delayed progress toward their goal of homeownership.

For informational purposes only. Always consult with a financial advisor before proceeding with any real estate transaction.

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