What Is An Earnest Money Deposit & How Much is Ok?

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Real Estate

Hello & Welcome back to #FabulousFriday!  Today's blog will cover the topic of earnest money deposits and how much is enough?  First things first-what is an earnest money deposit? An earnest money deposit is the money a buyer puts down when making an offer to purchase a real estate property.  It is the deposit you will need that shows you are serious about purchasing.  It is also known as a good faith deposit.  In other words, it demonstrates your willingness to close on the home you are interested in buying.  

When a buyer and a seller enter into a purchase agreement, the seller has to make it known that they have a current offer on their property.  If the deal falls through, the seller has to relist the home and start all over again.  This can result in a financial loss of both time and money for the owner.  Depending on the area you are buying in, the earnest money may protect the seller if the buyer backs out.  If everything goes smoothly, and both the buyer and the seller go to the closing table, the earnest money deposit gets credited to the buyer's down payment or to their closing costs.  

Earnest money is almost always a requirement and should be planned for when shopping for a home, especially in a competitive real estate market.  Sellers tend to favor buyers that put down a larger deposit when reviewing multiple offers.  This is because there is a greater risk to the buyer in the event the deal falls through.  In this type of situation earnest money can be thought of as an added incentive for both buyer and seller to complete the real estate transaction.  The earnest money deposit can also lower the amount you will need at closing because it will be applied to either your down payment or closing costs on the final closing disclosure.  Essentially, you're putting up some of the money needed at closing earlier in the process.  

The amount of earnest money you put down depends upon the particular real estate market your property is located in.  A real estate listing that has been lingering on the market may not require as much earnest money as in a hot market with multiple buyers who are vying for the same property.  If you plan to purchase in a neighborhood where cash offers and bidding wars are common, a higher good faith deposit can be a good idea.  Your real estate agent will be able to guide you and provide direction and advice on how much you should offer.  Especially if you are competing with other buyers for the same property, it is in your best interest to put down a larger deposit because you risk loosing competitively to a different buyer who put down a larger good faith deposit.  If it's a slow or moderate market, your agent can advise you if a smaller earnest money deposit will be acceptable.  

Many buyers wonder...is an earnest money deposit refundable?  The answer is--it depends.  Earnest money has contingencies that protect both the buyer and the seller in certain circumstances.  When you make an offer on a home and the seller accepts, the sale is only finalized once the contingencies get removed.  There are three basic contingencies-a home inspection contingency, an appraisal contingency and a financing contingency.  I will cover those three topics in future blog posts.  So, be sure to come back next Friday for more real estate topics.  In the meantime, if you are considering buying a home and want more detailed advise, reach out to us today.  One of our friendly, knowledgeable Shaffer agents will be glad to go over the details of the home buying process with you.  

See you next week for more real estate tips and tricks.  Warmly, Susan