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Most buyers know that they need to spend money to buy a home, but few know that they need it so soon. The earnest money deposit is the initial deposit that a buyer makes toward purchasing a home, usually within a day or two of submitting an offer. Keep reading to learn what this deposit is, how it works, and what you can do to keep your money safe.
What is an earnest money deposit?
An earnest money deposit is a good faith deposit that’s typically considered part of submitting an offer. It shows the you, as the buyer, are serious enough about buying the home that you’re willing to put some money on the line. The deposit is held by the listing agent’s office and may be cashed and put into an escrow account until settlement.
If the contract goes through without issue, your earnest money deposit will be treated as part of your down payment. However, if you break the contract, there is a chance that the sellers may be able to keep your deposit money as compensation for losing out on your offer.
How much of a deposit is enough?
The truth is that there’s no “correct” amount to put down in an escrow deposit. Typically, buyers will put down anywhere between 1%-5% of the home’s sale price. Though, you’re free to put down any amount that you would like.
Deciding on a deposit amount is about striking the right balance. On the one hand, you’ll want to put down enough money that the sellers will take your offer seriously. On the other, know that if you choose to walk away from the home, you could end up loosing your deposit. You only want to put down an amount that you’d feel comfortable losing.
As a rule of thumb, the more you put down in an earnest money deposit, the stronger your offer will look.
When can the sellers keep your deposit?
Put simply, the sellers can keep your earnest money deposit if you break the terms outlined in your contract.
Nearly every real estate contract has a few contingencies that will allow you to walk away from the contract with your security deposit in-hand. However, if you decide to leave the contract outside of those predetermined contingency time frames, there’s a good chance that the seller will be able to keep your money.
How to keep your deposit money safe
With that in mind, there are a few things that you can do to help keep your deposit money safe:
- Know your contingencies: Contingencies are the key to keeping your deposit when exiting the contract. Make sure you’re aware of what contingencies are written into your contract and how they function.
- Pay attention to their time frames: In order to keep your deposit, you need to adhere to all the time frames outlined in the contract. Pay close attention to what needs to be done when, so you can be sure to uphold your end of the bargain.
- Ask your real estate agent: If you’re getting cold feet and are unsure of how to proceed, ask your agent for guidance. He or she will be able to go over your options with you.