How Does An Earnest Money Deposit Work?

Posted by First Team Real Estate on Thursday, August 31st, 2017 at 8:00am.

If you’re in the market for a new home, you’re probably aware of the “earnest money” deposit that’s customary to put down when you make an offer. But if you’re like most, you’re unclear exactly how it works. The gist of it is that it’s very rare for a homeowner to accept an offer without a deposit—that’s earnest money, and if the sale goes through as planned, it will apply toward your down payment or closing costs. 

Because knowing the specifics on earnest money is really the only way to proceed in a manner that’s informed and prudent, we’ve put together a handy primer on it. Here, six things you need to know about earnest money.

As for how much money, it varies.

Some sellers will assign a flat rate for earnest money, usually anywhere between $1,000 and $10,000, depending on the value of the home being sold. Others will arrive at a sum by calculating a percentage of the listing price. While there are several intricate factors at play here, 3-4% is fairly standard.

You’ll risk losing it if you waive your contingencies.

When you place an offer on a home, you’ll want to protect yourself by including the appropriate contingencies in the contract. These are simply conditions that the seller must ensure are met in order for the sale to go through. If you waive your contingencies, and you find that there’s something wrong with the property and you no longer want to purchase it, you won’t have a leg to stand on, and you will lose your earnest money deposit. Therefore, unless you’re an attorney or a real estate professional, don’t attempt to draft such a contract yourself!

Always be mindful of the timeline.

Another way to risk losing earnest money? Not sticking to the timeline that you agreed on in writing, when the offer contract was executed. If you need an extension for any reason, then by all means, ask for one—and be certain to get it in writing.

If possible, avoid changing your mind at the last minute.

The whole point of earnest money is to prove to the seller that you’re serious about your offer. If you change your mind and it’s late in the game, then the seller may keep the money as compensation for their time and effort—not to mention the money they’ll spend relisting the property.

Always use a third party to handle earnest money.

This is why escrow and title companies exist. If you opt to forego a trusted third party, then you are putting yourself at risk of losing your money—with little recourse.

There are instances in which you’ll get your earnest money back.

For example, if the home’s appraisal comes in, and it’s lower than the minimum you listed as a contingency, then you have the option to walk away from the deal and reclaim your deposit without penalty. Likewise, if you covered the possibility of financing falling through in your contingencies—and then it happens—you’ll be completely safe. And, in the event that the seller backs out, so long as the contract has been executed properly, you’ll get your money back.

The bottom line? You’ll feel so much more confident about placing an offer on your dream home—and putting down an earnest money deposit—when you work with a First Team Real Estate agent

Email us at clientservices@firstteam.com

Call us at 888-870-1142

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