What is earnest money and why is it important
When you finally find the house or condo that is your dream home and you are ready to write an offer, you will be asked to have money available for your earnest money deposit. Earnest money will either be in the form of a personal a cashier's check depending on the size of the check that needs to be written. On houses in the $0 - $500,000 range a personal check will normally suffice however when you get higher than that a cashier's check is preferred because it takes less time to clear. Earnest money is extremely important in the home buying process. When you write your offer you will include earnest money as a show of good faith to the seller that they can remove their home from the market and stop showing it to other people. In the event that you default on the terms in your contract the sellers have the right to take that money and re-list their home for sale. There are two stages of earnest money; your initial earnest money and the balance.
Initial Earnest Money
The initial earnest money is deposited when the terms of your first offer are accepted. Usually, you have 2 days to deposit your earnest money from the date of acceptance. You have two choices when it comes to earnest money. You can either deposit a percentage of the price of the home, or you can deposit a set dollar amount. 1-2% or $5,000 whichever is greater is suggested and remember, this money will count towards your down payment later.
Earnest Money Balance
The balance of your earnest money will be due once the contingency periods are all finished except for the mortgage contingency. Your balance deposited is adjustable but should normally be in the range of 5%-10% of the purchase price of the home. This deposit is used to show the seller that you intend to move forward in the transaction and that they can leave the home off of the market.
How to protect your earnest money
Putting your money on the line is always scary. There are ways to protect your money but there are always chances of losing it so be sure to be as cautious as you can be. Your money is protected through a series of contingencies that allow you the option to back out a deal if there are problems. The contingency periods are highlighted in this article. Remember that if something is majorly wrong with the home, the mortgage or the negotiation process you can back out. Earnest money will be a part of every transaction. Ensure that you have a good attorney to help protect you!