Saturday, 28 March 2020

Earnest Money: 5 Things You Need To Know About How It Works

Posted On Wednesday, 26 February 2020 12:15

When purchasing a home or any real estate property, you may need to pay a downpayment. But before such, you also need to pay earnest money or an earnest money deposit. Below, you'll learn what this is and why earnest money is essential. 

Aside from that, it is also very important to know how much you should give and when to give the money. Moreover, you should even know who'll hold the money and whether you can withdraw it or not. 

To know more of these things, read the following about earnest money deposit:

1. Importance

To get a successful real estate property purchase, you need to follow a tedious process and comply with a lot of requirements. Lacking just one requirement or being unable to do one of the many steps will hinder you from purchasing a real estate property. One of the important of these is the earnest money. 

Earnest money is a deposit to show your good faith in buying a house. It means you're serious about it, and you're ready to pay for the purchase. 

It may seem trivial, but earnest money is a vital statement. Since earnest money shows you're serious in purchasing a property, you get more attention than other buyers. Also, you're developing a good relationship with the seller, which results in having a good position when negotiating. 

As for the sellers, earnest money assures them that the buyer won't just break the contract without any valid reason. Thus, it guarantees a purchase if nothing violates their agreement.

To put it simply, your earnest money is like your gateway to coming up with the best deal. Imagine this, when you want to get the best deal for your travel goals, you may need to use coupons and deals available at DontPayFull. In real estate, your earnest money becomes your coupon to help your offer get more priority over the others

2. Minimum And Maximum Amount

Before making an earnest money deposit, you should know how much you should give. Although there are no standard rules about the minimum and maximum amount you should give as an earnest money, some factors affect it.

Even if the amount of earnest money varies from state to state, one of the things you need to factor in is the price of the property. Some may ask you for 1% to 2% earnest money, while others can reach up to10% of the property's value. The latter percentage is most likely possible in housing markets with a lot of competition. But if the property is in a slow housing market, the amount of earnest money may only be around $500-$1000. 

To know whether the area is a slow or fast-moving market, you should consider the activity level of the market. If it's in a developed city with a high employment rate, then the prices of the properties are likely higher. Thus, you may need to give a higher amount of earnest money. If you want to be a top choice to become the buyer, you can also give a higher amount of earnest money, especially when there are more potential buyers of the same property.

3. When To Give 

Now that you know how you can offer as an earnest money deposit, you shouldn't waste time to give it. Especially when the property is doing well in the market, you must give your earnest money as soon as possible. 

Since the earnest money shows how serious you are in purchasing the property, you must give it early during the negotiations. If you want the seller to remove the property on the market listing, give your earnest money early on the negotiations to influence them to do so. 

However, you shouldn't just give earnest money without signing a contract. If you're willing to give the earnest money as soon as possible, it should still be done during the contract signing. 

4. Who Holds The Money

Giving the earnest money doesn't mean handing it directly to the seller or an individual. It is also not given even to your real estate agent. Instead, you should deposit it to a third-party institution, which can be a reputable law firm, an escrow or title company, or a real estate brokerage. 

With these third-party financial companies, the earnest money goes into an escrow account. An escrow account means that your funds or earnest money is held in a safe account, which is not under your name or the seller's name. 

By doing such, your earnest money is in safe hands. Moreover, your earnest money will only be applied for the closing costs or downpayment. 

Not only that, but escrow account providers don't care about who gets the earnest money. According to the purchase offer and contract, the earnest money will only go to the entitled one. 

5. How To Withdraw

Yes, it's from you, but your earnest money may go to the seller for some reason. Because of this, it's also possible to withdraw the money for contingency reasons.

This is also why it's essential that the contract must contain the contingencies before signing it. Here are some of these that must be included:

• If issues are arising during the due diligence, then the buyer will most likely get back the earnest money. Due diligence refers to a period, which is usually a week or longer, where land survey, title search, appraisal, and home inspection happens.

• For financial contingencies, it happens before the binding agreement, usually between two to three weeks before the actual purchase. For instance, if the buyer doesn't get a loan approval, then he may get his money back.

• If the buyer owns a house and can't sell it within the time period, then this contingency allows the buyer to get his money back. It's because this contingency restricts the buyer to have only up to two mortgages at the same time.

• Lastly, if the seller terminates the contract, then the buyer will most likely get the earnest money.

However, it's only possible to get your earnest money back if all the contingencies are listed on the contract. If you backed out on the contract for any reason not stated in the contract, the earnest money will go to the seller. That's why the contract must specify all possible contingencies to protect you as the buyer. 


Now those are the vital things you need to learn about earnest money. From why you should give an earnest money to how much you should give, those things will determine your chances of getting a deal of the property. No matter how much you give, you shouldn't worry because an escrow account is there to secure your money. 

So the earlier, the better when giving an earnest money deposit. Not only is it safe, but you can even withdraw it if contingencies arise before the closing. As long as they're stated in the contract, then your earnest money will surely go back to you.

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