What is earnest money and why is it important
When you finally find 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 check, a wire or a cashier's check depending on the size of the check that needs to be written. Earnest money is extremely important in the home buying process because earnest money is 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. Initial earnest money is traditionally 1% of the purchase price of the home. Remember, this money will count towards your down payment later.
Balance Earnest Money
The balance earnest money will be due once the attorney review contingency has been completed. You will have two days to submit balance earnest money. Typically, you will increase the earnest money to 3% 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 and will still be credited to your down payment at closing.
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 include attorney review and inspection, board review, and mortgage contingency. Remember that if something is majorly wrong with the home, the mortgage or the negotiation process you can back out as long as you still fall within the contingency timeframes. Earnest money will be a part of every transaction. Ensure that you have a good attorney to help protect you throughout the transaction.