Earnest Money and House Deposits Explained

What to Know About Home Deposits and Earnest Money

Once you’ve found your dream home, you need to convince the seller that you’re serious about buying. This will assure them that they can safely take their home off the market and sell it to you. This is achieved through an earnest money house deposit.

But how do home deposits work, and what do you need to know?

Let’s take a look.

The Essentials of Home Deposits

When you make an offer on a house, you want the seller to take their property off the market. This isn’t without risk for the seller, and to show you are serious about the purchase, a good faith house deposit is required.

An earnest money deposit makes it difficult for buyers to place offers on multiple homes, later dropping most of them after the sellers have taken their home off the market. This would waste the time of the sellers and likely increase their selling costs.

Having a requirement of a few percent of the purchase price to be paid into an escrow account protects the seller should the buyer want to quit the deal. The deposit will then be used as part of the closing costs or down payment when the purchase successfully closes.

Why Do You Need to Pay a Deposit?

There isn’t always going to be a requirement to pay an earnest deposit, but if the local market is relatively strong, it is very likely to be required. In a hot market, an earnest money deposit will be preferred by the seller to protect them, as well as adding some security for the buyer.

Since this is money that will go to your home buying expenses anyway, there isn’t really a huge downside to it. Though it does mean finding some of the money earlier than you would otherwise need to.

How Much Do You Need for a Home Deposit?

Typically, you can expect to have to pay more in hotter markets. If the home has been on the market for longer, the deposit needed might be lower. If there are many potential buyers for the home you want to buy, a larger deposit is a better idea.

Your real estate agent should be able to direct you towards the right amount of deposit to offer the seller. More considerable sums will look better to the seller if you are competing with other buyers. In most real estate markets around the country, you can expect to pay somewhere between one to five percent of the purchase price for an earnest money deposit.

Your real estate agent should be able to suggest the right amount of earnest money based on local customs.

Getting Your Earnest Money Back

When making an offer on the home, there are clauses to let you walk away from the contract with your deposit returned. These common real estate contingencies will ensure certain things happen in the buying process, protecting the buyer if they don’t.

Quite often, buyers and sellers ask who gets to keep the earnest money deposit. The answer depends on who didn’t follow the contract properly.

Typical Contingencies That Would Allow The Return of Your Earnest Money

• Home inspections
• Mortgage contingency
• Real Estate Appraisal
• Home sale contingency

These are the most typical contingencies that could allow for the return of your home deposit. Let’s take a careful review of each of them.

Home Inspections

A home inspection is one of the most vital aspects of purchasing a home. When you are buying a home for the first time, you want to ensure you’re not buying a lemon. If you made an offer and then found there were significant structural problems, you would be in trouble without a home inspection contingency.

This allows you to have a home inspector check the property, and if there are serious concerns discovered, you have the option of walking away without losing your deposit. If the issues found aren’t severe, you could request the seller to make repairs or renegotiate the offer.

Financing

Even if you are preapproved for a mortgage when you make an offer, you could still have problems getting a loan from your lender when you need it. A financing contingency protects your earnest money should you not be able to get the loan you need to purchase.

Appraisals

An appraisal contingency will come into effect should the home be appraised lower than the offer amount. In such a circumstance, you would have to make up the difference, and this could make it impossible to continue with the purchase.

The lender will hire an appraiser to find the fair market value of the home. If it doesn’t reach the offer price, you can walk away from the purchase with your earnest money.

Selling Your Home

If you need to wait for your existing home to sell before you can purchase, the selling contingency will protect your deposit. If your current home doesn’t sell, you can recover your earnest money and move on.

Fewer Contingencies Are Better For Sellers

From a sellers standpoint, the fewer contingencies there are, the better. With fewer contingencies, the probability of the sale going through increases quite a bit.

When people ask what does contingent mean, the above items discussed are likely the reason. Once the contingencies are removed, a house will then be marked under agreement.

Waiving Contingencies

When there are many potential buyers, you can be put under pressure to reduce the contingencies on your offer. This will help the speed of the purchasing process and may convince the seller to go with your offer. However, this could leave you in a difficult position if things don’t go to plan.

It may be possible to waive a financial contingency if you’re confident your loan will be approved, though others could be riskier. An inspection contingency could save you even if the home appears to be in good condition and shouldn’t be removed. Unless you are very certain about the fair market value, the appraisal contingency should be kept too.

Protecting Your Deposit

Since we are talking about thousands of dollars, you need to be careful about the deposit so that you don’t lose the money. It will be essential to keep a close eye on each of your contingency dates. You will want to make sure that none of them lapse.

Escrow

When paying an escrow deposit, it shouldn’t be given to the homeowner but the seller’s real estate agent or title company depending on local customs. Paying the money to the escrow or title company helps to avoid fraud. This should be paid using a certified or personal check, or through a wire transfer, so there is documentation. Additionally, ask for a receipt if you paid using a check.

Your Responsibilities

Once you are happy with the contingencies and have agreed to buy the home with the seller, you have to remember your responsibilities under the contract. This will set a timeline when certain things have to be completed to stay within the agreement. The seller could potentially withdraw from the deal should your responsibilities not be met.

Document Everything

Since there is a large amount of money involved in a house purchase, it is always a good idea to make sure everything is documented. Any changes to the timeline or your contingencies should be put in writing. Also, make sure your contract sets out what happens when the deal is ended and how you get your house deposit back.

Final Thoughts on House Deposits

A deposit might just appear to be another expense you have to cover when buying a home, but it protects you if something goes wrong. The money will end up going towards your other expenses anyway when you successfully buy the house. Hopefully, you know have a much better understanding of how earnest money deposits work in a real estate transaction.

Other Helpful Home Buying & Selling Resources

• What Does Highest and Best Offer Mean? via Michelle Gibson
• What are the steps to buying a house?
• Is It A Bad Idea To Waive A Home Inspection? via Kevin Vitali
• What Home Features Do Buyers Look For? via Danny Margagliano

About the author: The above article on “Earnest Money & House Deposits Explained” was written by Bill Gassett. Bill has been working in the real estate industry for the past thirty-three years. He works for RE/MAX Executive Realty in Hopkinton Massachusetts. Bill loves providing trustworthy information to buyers, sellers, and fellow real estate agents to make the best possible decisions. His writing has been featured on RIS Media, National Association of Realtors, Inman News, Placester, Today.com, Credit Sesame, and others.

About Rochester’s Real Estate Blog: Rochester’s Real Estate Blog is owned and operated by Kyle Hiscock of the Hiscock Sold Team at RE/MAX Realty Group.  With over 40 years combined experience, if you’re thinking of selling or buying, we’d love to share our knowledge and expertise.

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