We all know about the closing costs and down payments associated with buying a home, but what about earnest money deposits? An earnest money deposit shows a seller that you are serious about buying their property. With an earnest deposit, you can make offers on multiple homes and essentially put them off the market until you decide which property best suits your needs – an uncomfortable situation for everyone involved.

What is the deposit for?

We don’t hear about a money deposits as much as we do a down payment when buying a home. Some might even confuse it for the common option money fee, which is a separate fee the borrower may choose to place into the purchase agreement. Options fees are non-refundable, whereas earnest deposits can be refunded and if everything goes well, the money can be rolled into the down payment or added towards closing costs.

Are they required?

If the seller is familiar with earnest money deposits and you’re not, it’s quite common that sellers will not move forward with the deal unless they are made.  This is because earnest money deposits are seen as a token to make a serious deal.

The money that is made from the deposit goes towards the down payment and other closing costs. If somewhere down the line you lose interest in the home, you can potentially get the deposit back for a fee, which will be collected from the funds of the deposit.

Deposit amounts

Because markets vary from area-to-area, deposits may vary. Overall though, the amount is negotiated between you and the seller, not the lender. One factor that may contribute to the amount you fork over may be the interest rate of the mortgage that will be used to fund the property. If you’re dealing with a higher interest rate, higher deposit amounts will show you’re dedicated to the transaction. Other variables that can factor in include local market conditions, the price of the property and the type of property. Low deposit rates may be something like $500 to $1,000, while competitive markets may call for up to 2%-3% of the purchase price.

Most home sellers will keep their property open to the public until a “serious” buyer comes along. Deposits are a way to so-called “claim” a property you may be very interested in. The motive of giving a higher deposit than one that is just required is backed up by the notion that a seller will in the end do business with the highest bidder. What this means is that if someone is offering a higher deposit than you, the seller will accept theirs over yours. This is justifiable by the fact that earnest money deposits are not collected until your offer is accepted and you sign the purchase agreement (which entails how the money will be handled). Other components that the purchase contract includes are the amounts to be paid, the date of the payments, whether it will be credited against the purchase price at closing and what will happen if complications arise to the final transaction.

Eligibility of getting your money back in the event of complications all depends on who was holding the funds. After this process, title companies will hold the deposit money, although some states enable realtors to hold deposits. If this is the case, be sure to do your research on the credentials of the firm or broker. Personally handing over the thousands of dollars to the seller is not advisable, because it could cause unwanted complications.

Drawbacks with large sums of cash

A drawback with giving large deposits lies with lenders snooping around in your business. If you decide to fork over a higher deposit because you figure it will pay for your down payment and closing costs eventually, you will indeed have to deal with paperwork to prove where your source of money is coming from. Proving you’ve had the money for at least 60 days may get you out of this hot water.

Another drawback that borrowers may not know about is that there is no federal law that grants borrowers the right to cancel their purchase contract to get a refund of their earnest money deposit. Although this is true, federal law does protect a borrower’s right to cancel certain home loan commitments within three days.

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