Hints & Insights - The Earnest Money Deposit
When a buyer writes an offer to buy a house they normally write a check, too. This check is often referred to as the "earnest money deposit." The basic reason for the deposit is to for the buyer to impress the seller that they "earnestly" intend to purchase the property.
The amount of the deposit varies from purchase to purchase depending on a variety of factors. If a property generates a lot of interest, a buyer may make a larger deposit to impress the seller that their offer is stronger than the others. During "hot" markets, deposits are generally larger than during slow markets.
In normal times, buyers should hesitate before making a deposit that is larger than two percent of the purchase price. Underwriting guidelines sometimes require strict documentation of such deposits including proving you had the money in the first place and proving that the check actually cleared the bank. If you're closing quickly, this might require a trip to the teller window at your bank.
There are reasons to try and keep the deposit as small as possible but not so small that the seller doesn't take it seriously. You see, once a buyer and seller agree to terms, the earnest money deposit is usually placed in a "trust" account. At that point it is no longer the buyer's money -- it belongs jointly to the buyer and seller.
Almost all deals close and the earnest money funds are applied to the buyer's down payment and closing costs. As the saying goes, however -- there are exceptions to the rule.
Some sellers think that if the deal falls through, the earnest money deposit is automatically forfeited. Some buyers think that if the deal doesn't close, they automatically get the money back.
Neither one is true.
Even when the failure to close is the buyer's fault, the seller doesn't have a "right" to the deposit as a way to "punish" the buyer. Nor does the buyer automatically get the entire deposit back even when they are not at fault.
Since the deposit is held in trust, both the buyer and seller must agree on the disposition of the funds. This is a quirk of law in most states and the real estate agents and their companies have no control over the situation.
If something goes wrong very early in the deal, the seller normally understands, and the deposit is usually returned to the buyer without a fuss. When things go awry later in the transaction, both parties usually exercise common sense and negotiate a fair solution. In a few rare occurrences, the buyer and seller find if difficult to agree.
The point is, it always makes sense to reach an agreement. Failure to agree doesn't serve either side. It just ties the money up for awhile, could possibly lead to further legal action and inconvenience, and it just becomes a frustrating mess for both sides -- more so than you realize at the time.
Serious problems are the exception, not the rule. Most "challenges" are routine to a qualified professional real estate agent. The situation may be new to you, but we have dealt with it many times in the past.
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