How do I not lose my earnest money?
The earnest money pledged with an offer can be a vital tool (among many others) that a skilled agent can use to strengthen a buyer's offer. However, the EMD is both a tool and a risk to the buyer. Although buyers losing their earnest money deposit is relatively rare in our market, it can and does happen.
The earnest money pledged with an offer can be a vital tool (among many others) that a skilled agent can use to strengthen a buyer's offer. However, the EMD is both a tool and a risk to the buyer. Although buyers losing their earnest money deposit is relatively rare in our market, it can and does happen.
The purpose of earnest money is to provide the seller with compensation in the event that the buyer backs out of the deal through no fault of the seller and in violation of the agreements in the purchase contract. If that happens, the seller gets to keep the earnest money.
Earnest money, also known as a pledge, is a certain amount of money that a buyer pays to a seller to demonstrate his good faith and intention to complete the transaction. The amount is usually 1%-2 % of the sale price or a fixed amount. Earnest money is also known as a binder or token money.
If you back out because a contingency in your contract was not met, in most cases, you'll get your earnest money back. Common reasons why buyers might back out of a deal: Their financing fell through. They unexpectedly lost their job.
If you have an inspection contingency, you can either renegotiate with the seller and ask them to complete the repairs before closing or decide it's not worth it and walk away with your earnest deposit. If you didn't have a home inspection contingency, walking away might mean forfeiting your earnest money deposit.
The earnest money deposit is held in reserve, either by an escrow firm or attorney, depending on the law in your state. Technically, nobody "gets" the earnest money until the sale is completed or canceled: If the sale is successful: the earnest money is applied to your down payment on the home purchase.
If the buyer's offer is accepted, earnest money goes toward the down payment and closing costs. If the sale falls through, buyers may be able to get some of the earnest money back depending on the circ*mstances.
Julie notes that, “There are several reasons why escrow can fall through. The buyer can't sell their current home... the buyers are unable obtain loan approval, bank appraisal issues, qualifying issues, and sometimes the buyer experiences remorse.
Typically, the money is kept in an escrow account held by an escrow company, a real estate title company or the seller's real estate agency. Don't give the earnest money directly to the seller because you might have trouble getting it back if things go awry. The earnest money is disbursed at closing.
Why is earnest money refundable?
Many home-purchase contracts list contingencies, which are conditions that must be met for the deal to close. If one of the contingencies listed in the purchase contract cannot be met and the deal cannot close, the buyer may be entitled to a refund of the earnest money.
Sometimes a relative or close friend offers to give you money to help buy your home. If the earnest money comes from a gift, you'll need a signed gift letter to show proof of the escrow deposit. The letter will need to include the amount of the gift, the relationship of the donor, and that they do not expect repayment.
Earnest money usually equals between 1% and 5% of the sale price as a deposit. However, some sellers ask for a fixed amount ranging from $5,000 to $10,000. Sometimes, the bigger the good faith deposit, the more serious the buyer is considered to be.
Note that wiring the Buyer's EMD is preferred. This shows a solid interest from the Buyer to the Seller and resolves any issues with the check being returned for non-sufficient funds or being stop paid. Additionally, wiring the EMD directly to escrow allows the escrow process to start right away.
If your EMD was paid by someone else who is not part of the transaction, this will be considered a gift and you will also need to provide a gift letter (see Gift Funds for more info).
A seller that feels entitled to the deposit or a buyer that feels a refund is deserved will try to get escrow to release the deposit. Escrow cannot release the deposit without instructions signed by both the buyer and seller or a court order from one of the parties.
While laws vary by state, in general, up until that contract is signed by both parties—even after counteroffers have been sent out—all new offers can be considered and accepted. Once both parties have signed it, however, the seller is pretty much locked into the deal.
In most cases, a change of heart on your end means you're going to lose your earnest money. But you may be able to get it back if: The seller decides to take the home off the market. You can't get a mortgage that will allow you to buy the property.
Earnest money isn't always a requirement, but it could be a necessity if you're shopping in a competitive real estate market. Sellers tend to favor these good faith deposits because they want to ensure that the sale won't fall through. Earnest money can act as added insurance for both parties in the transaction.
Depending on the circ*mstances, this money may be recovered through the legal system. In terms of refusing to close on a building contract, if the buyer defaults, the seller can sue for the difference in money damages that were incurred as a result of failing to close the contract.
How important is earnest money?
When you find a home and enter into a purchase contract, the seller may withdraw the house from the market. Earnest money, or good faith deposit, is a sum of money you put down to demonstrate your seriousness about buying a home. In most cases, earnest money acts as a deposit on the property you're looking to buy.
An earnest money deposit, EMD, (money to show the seller you are a serious buyer) is given to a usually neutral and impartial, third-party (typically the designated title company) to hold throughout the process of the sale. Your money is now in escrow. This is an important step for the safety of you and your money.
The Agreement provides that when escrow opens a transaction, the earnest money is to be deposited into its trust account, and not released before closing except upon written instructions of the seller and buyer.
Who owns the money in an escrow account? The buyer in a transaction owns the money held in escrow. This is because the escrow agent only has the money in trust. The ownership of the money is transferred to the seller once the transaction's obligations are met.
Once again, if you have a contingency in place that covers a loan falling through, you should get your earnest money back. But if the contingency isn't there, you'll lose that money.
