When you find a home and enter into a purchase contract, the seller may withdraw the house from the market. Earnest money, or good faith deposit, is a sum of money you put down to demonstrate your seriousness about buying a home. Show
In most cases, earnest money acts as a deposit on the property you're looking to buy. You deliver the amount when signing the purchase agreement or the sales contract. It can also be part of the offer. The seller and buyer sign a contract that defines the conditions of refunding earnest money. Importance of earnest money
When buying a property with high demand, a considerable deposit can compel the seller to select your offer over others. You may also get more favorable contract terms. Parties in a home sale can agree to apply earnest money to the buyer's down payment or closing costs. In such a case, you're putting up some amount for the home in advance. How much earnest money should a homebuyer pay?The amount of earnest money you offer varies based on the market and the condition of the house. If you want a home in a location prone to bidding wars and cash offers, you may have to offer a considerable amount. A lower earnest money deposit may be suitable for a fixer-upper in a slow market. In most real estate markets, the average good faith deposit is between 1% and 3% of the property's purchase price. It can be as high as 10% for highly competitive homes with multiple interested buyers. Some sellers prefer to set fixed amounts to help filter out buyers that aren’t serious. The best way to determine a reasonable earnest money amount is to talk to an experienced real estate agent. They’ll assess the property and market-specific factors and quote a figure within the standard range. While losing your good faith deposit is unlikely, offer an amount that the seller will appreciate without exposing yourself to financial risk. Paying earnest money depositTypically, you pay earnest money to an escrow account or trust under a third-party like a legal firm, real estate broker or title company. Acceptable payment methods include personal check, certified check and wire transfer. The funds remain in the trust or escrow account until closing. That's when they get applied to the buyer's down payment or closing costs. Alternatively, you can receive your earnest money back after closing. Conditions for earnest money refundsContrary to popular belief, homebuyers don't always forfeit their earnest money to the seller if a deal fails. The buyer gets their good faith deposit back if r the seller terminates the home sale without a valid reason. You may also reclaim your money if the reason for contract cancellation is a contingency outlined in your purchase contract. Examples of known real estate deal breakers include:
It’s important to understand potential contract contingencies, so be sure to go over the contract with your real estate agent or attorney. Reasons you can lose earnest moneyThere are times when homebuyers lose their earnest money after a broken deal. Two scenarios that may lead to the forfeiture of your good faith deposit are:
What if I change my mind?Property buyers get their earnest money back if the deal goes south for reasons covered in contingencies. Otherwise, there’s little or no chance of a refund. If you change your mind late in the buying process for reasons other than contingencies, the seller can keep the earnest deposit. It compensates them for the time, money and effort required to list the property again and obtain another buyer. How to protect earnest moneyTake the following measures to protect your earnest money from fraud or unjustifiable forfeiture:
Buying a home is a big purchase. You want to make the best offer and protect yourself in the process. Earnest money allows you to communicate your seriousness and ensure your seller is committed. If you’re a first-time homebuyer, speak to a Home Lending Advisor to learn more about ins and outs of earnest money. Who keeps earnest money if deal falls through?If the buyer decides to cancel the sale without a valid reason or doesn't stick to an agreed timeline, the seller gets to keep the money. These are the most common ways a buyer will lose their earnest money. Adhering to an agreed schedule is very important when it comes to buying and selling a home.
Is earnest money refundable in Virginia?If the deal goes as planned, the earnest money deposit may be directly applied to the down payment or closing costs. On the other hand, the earnest money deposit can go back to the buyer if the home doesn't pass the inspection or other contingencies listed in the purchase agreement.
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