You have finally found your dream home, and are thrilled to be writing an offer on it. You sit down with your agent, go through all the paperwork and then she asks you to take out your checkbook. You and your spouse glance at each other questioningly. Why do you need your checkbook? Who are you paying and why?
Your agent is likely asking you for an earnest money deposit. An earnest money deposit is simply a way to show the seller that you are a serious buyer. The higher the earnest money deposit, the more serious you are likely to look. While earnest money deposits can be any amount you choose, they standard rule of thumb is 1% of the price of the home.
You take out your checkbook, write the check, and hand it to the agent. Now what happens to it? Once your offer to purchase is accepted, your earnest money check will be deposited into a trust account, held by the real estate broker’s office. A trust account is an account that every broker must have, and it earns absolutely no interest. So, no, the broker does not benefit at all from holding your money. If your offer is not accepted, and an agreement is not reached to purchase, your check will be returned to you.
If you have the funds available to you, and absolutely do not want to lose the house, I suggest making a large earnest money deposit. This will show the seller how serious you are about buying, and hopefully put you in front of any other offers that may come in.
If you agree to purchase a home for $200,000, and you are obtaining a mortgage while putting $40,000 down ( 20 percent), your earnest money deposit will be put towards your down payment. For instance, if you give a $5000 check to your agent, she deposits it, and your lender will now only require $35,000 to be brought in for down payment. Your earnest money deposit is not lost money.
The only instance you can lose your earnest money deposit, is the unlikely occurrence that you skip town, or back out of the deal for no reason at all. If your financing falls through, or your home inspection turns up many problems, you can walk away and get your money back if your offer was written up correctly (as long as you use an agent, you are fine).
What do you do if you have limited funds, and are doing a 0 down mortgage? Do you still need earnest money? This depends on the circumstances. Earnest money is not a requirement to buy, unless the seller absolutely requires it. If you are dealing with a bank owned home, you can be assured that you will need to put down a minimum earnest money deposit, likely $500 to $1000. If you absolutely do not want to put that much money down, and you are dealing with a homeowner seller, I would recommend at least leaving a $100 earnest money deposit. Remember, that money will come off the price of the home, go towards your closing costs, or if you were able to wrap all that in, you will get that earnest money check back at closing. Hopefully, since you are purchasing a home, you can afford to put down at least $100. If not, this might not be the time to buy a home.
If you have any further questions, don’t hesitate to call your agent. He/she has been educated in these transactions and can help answer and address all questions or concerns.
Good luck in your purchase!
