Is earnest money the same as down payment?
While many inexperienced home buyers think that this is the down payment, it really isn't. The earnest money deposit is made along with your offer to show the buyer that you are a serious buyer and goes TOWARDS your down payment. The down payment, of course, is much larger and comes at the time of closing.
However, while an earnest money deposit is indirectly given to the seller, a good faith deposit is paid directly to the lender. Like earnest money, if you close on the mortgage, the good faith deposit will go towards closing costs like appraisals, credit checks, underwriting, and other loan processing fees.
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.
But what happens if you don't have the necessary funds? In that case, there are several alternatives available such as an Option Agreement, Escrow Account, or Letter of Credit, which still allows potential buyers to enter into negotiations with sellers and potentially buy the property they're interested in.
Many potential homebuyers ask what the purpose of earnest money is and how exactly it works. Earnest money works by offering a portion of cash up front — usually 1-2% of the purchase price — as incentive to pull the property from the market and consider your offer exclusively.
A buyer makes an earnest money deposit when they and seller agree to the purchase in writing. Earnest money, or a good faith deposit, is often held in an escrow account until you close. Once you close on the home, the earnest money deposit goes toward your down payment and closing costs.
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.
You can, however it is not typically advised. Be aware that changing your down payment amount can result in delays in the process. Your loan will likely need to be rewritten to accommodate for the change – and, if the amount is less than initially planned, you could be at risk of losing your loan approval.
While a contract, to be valid, must have consideration, earnest money is not the only consideration included. Earnest money is a good faith deposit and may not be necessary to have a valid contract.
Usually, the title company will cash your earnest money check immediately to ensure you have the funds and don't spend the money on something else. You'll typically hand over a certified check when you sign the purchase agreement. Sometimes buyers will submit earnest money with their initial offer.
Is $10,000 enough for earnest money?
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.
The amount of earnest money you put down is considered negotiable. However, usually, the larger of an amount that the buyer puts down, the more serious he or she is about purchasing.
Like most things in a home purchase, you can try to negotiate the earnest amount down. If it is a seller's market, negotiating down will not likely work. Even if you have to deposit more than 5%, the home isn't costing you any more. If the deal successfully completes, the earnest money will go toward your down payment.
In competitive markets and in cases where multiple similar offers are being considered, a higher earnest money deposit can sometimes help guide the seller to the most motivated and capable buyer. By accepting an offer, a seller is committing to pulling their property off the market for a period of time.
Earnest money has become standard, especially in today's competitive real estate markets. The purpose of earnest money is to tell the seller that you're serious about purchasing the home. By backing up your offer with some cash, a seller is more likely to trust that you'll follow through with the home purchase.
Earnest money is an important part of the buying process because it assures sellers that a buyer is serious about their intent to purchase.
Can you borrow earnest money? It is not common or recommended to get a personal loan for an earnest money deposit. Besides enticing the seller, a good faith deposit shows a lender you are financially prepared for a mortgage. If you're concerned about coming up with earnest money for a house, it could raise a flag.
Earnest money refers to a payment made from a hopeful home buyer to the home seller to show. This payment is separate from the down payment, though it does usually get applied to the total down payment cost. Earnest money is placed in an escrow and is seen as a token of good faith from the buyer.
The Due Diligence Fee is Not Earnest Money.
Due diligence money is non-refundable, whereas earnest money is refundable if the buyer decides not to buy the home within the due diligence period.
In a typical market, “It's really hard for a buyer to lose their earnest money,” says Allen. If the buyer is working within the guided timeline and purchasing contract, they have several opportunities to break the contract and walk away from the deal with their earnest money.
What happens to earnest money if deal falls through?
If you back out of the contract for an approved contingency, you will get your earnest money back. You can expect your earnest money back if: The home doesn't pass inspection. The home appraises below its sale price.
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.
Once your offer is accepted and the purchase contract is signed, you are bound to the terms of the agreement. However, you can still back out without penalty if you paid for an option period or have either an inspection or appraisal contingency. Just be sure to back out before the contingency expires.
Bottom line. “Generally, a seller can't cancel without cause,” Schorr says. “You could build in some contingency, but absent that, you had better be committed to the sale.” Reneging because you fear you underpriced the house, or you actually receive a better offer, doesn't count as “cause.”
And despite what you may believe, declining a job offer you've already accepted doesn't necessarily kill your chances of ever working with that employer. But mishandling the situation could close the door on future opportunities. So be sure to express your gratitude and appreciation for the offer.
