What is earnest money?

Are you thinking of investing in your first ever home or piece of land? There’s a lot that goes into such a big decision. With finances at stake, it’s important that you educate yourself about the rules, regulations and processes you’ll be dealing with on your path towards home ownership. This article has been written to help you along the way. If you’re thinking of buying a home, you’ll need to know about earnest money. When making an offer on a property, an earnest payment is usually requested to prove to a seller that you’re serious about buying. The definition of earnest is to show sincerity and conviction. Earnest money proves that you’re making an offer in earnest and not wasting the sellers time. If the buyer accepts your offer, you’ll have to hand the payment over and it is non-refundable if you change your mind.

earnest money

US Real Estate Market

In the US Real Estate Market there are some hot markets with very limited housing up for grabs. San Francisco,Austin ,NYC ,and Los Angeles are just a few of them. The  competition for properties in these areas can be fierce. For example,  if you want to be sure your offer is accepted, you should offer as high an earnest payment as possible. This is because earnest money demonstrates that you’re willing to invest money into the property, and therefore are less likely to back out of the sale. By offering a low earnest deposit, you could give the seller the impression that you’d struggle to afford the full payment. This could lose you your dream home.  Earnest money is an important part of the real estate industry. When a homeowner accepts an offer, they’re putting themselves at risk of the buyer defaulting out of the agreement. This can put the seller out of pocket, and if they’ve taken the house off the market- they’ll need to pay money to put it back on. Earnest money also protects the buyer from having the house sold out from underneath them whilst appraisals and home checks are being carried out- so it’s beneficial for both parties.

earnest money

Cash Deposits in Earnest Money

The amount of the earnest payment is usually a few percent of the overall cost of the property. This is ordinarily around 1-3 percent. However, some sellers put down a set earnest fee. For example, $20,000, which isn’t affected by the overall asking price. Different homeowners will accept different amounts of earnest money- depending on how much makes them feel secure enough to accept an offer. Before buying a property, you need to have a significant amount of savings as there are lots of fees associated setting up a sale.

Earnest money is most of the time negotiable and changes depending on the size, location and quality of the property. This is why it’s important to understand what you can get with your budget.  Sometimes, it can be arranged that the earnest deposit is paid off in two installments. This can be helpful if you’re waiting on money coming in, perhaps from inheritance, a job or tax return.

Earnest Money Process

If you’re thinking of selling your home, you can save yourself time and money by simply asking that potential buyers put down an earnest payment. Selling a home can already be a really stressful experience, so this is one way you can cut out setbacks. Some people put offers on homes left right and center, and you don’t want to be left disappointed when a buyer pulls out.

To prevent misunderstanding, you’ll need to sign a contract between seller and buyer. This contract will define how much earnest money is to be paid, along with any contingencies of the offer. Contingencies are circumstances which allow the buyer to receive a refund on their earnest money. There are numerous reasons why a buyer may deserve their money back.

•    The seller decides to keep the house.
•    The seller breaks an agreement in the contract.
•    The home turns out to need more repairs than advertised.
•    Unable to appraise home.

On the other hand, if the buyer backs out of the contract for any reason not agreed upon in the contract- the earnest money will be given to the seller. This money compensates the homeowner for wasted time and associated costs with cancelling the sale. The buyer will lose the money. If you’re putting down earnest money on a home, make sure you have contingencies laid out in the contract- to protect you from being ripped off.

If the sale goes on without a hitch, the earnest deposit is normally used as a down payment or to cover closing costs. So, your money doesn’t just go- it gets put towards the overall costs of purchasing. If you’re really serious about a sale, putting down an earnest deposit shouldn’t be a problem- because it’s money you’d be spending anyway.

Until it is certain who the money will be awarded to, the earnest money is kept in an escrow, a title company account, or a broker’s trust account. This means that neither party will have access to the funds until the transaction is either complete or defaulted.  Both parties have a right to the money, and whom the money goes to depends on whether the sale pans out. Once you’ve made an offer on a home, you’ll be expected to pay off the earnest deposit in one or two days. So, before you make any offers, make sure you have the funds immediately available if an earnest payment is needed.

Don’t get earnest money confused with a down payment, they’re two completely different things. An earnest deposit is money paid to the seller in order to prove commitment to purchasing the home. A down payment, on the other hand, is money paid to whoever is lending you the cash to buy the home- usually a mortgage company.

Unless you’ve come into a lot of money through something like inheritance, you’ll most likely be lending money through a mortgage to purchase your home. Make sure you find the right type of mortgage for you. Mortgages are usually from big banks or local credit unions.

Private Lending

But if your circumstances are unusual, a private mortgage may be a better fit for you. A private mortgage is lent out by an individual/business that doesn’t typically lend money. It can be a good option if you have a low credit score.  Many people don’t know what a credit score in. A credit score is a tool used by money lenders to decide whether you qualify for a mortgage or not. It’s usually a number between 300-500. A credit score can be affected by numerous things- such as how well you have managed repayments in the past and how much credit you currently owe. Sometimes, based on your financial history- you won’t be approved for a traditional mortgage. That’s when a private mortgage can come in handy.

Criteria For Private Lending

Private mortgages are much easier to obtain, as private lenders are more understanding and accepting when it comes to credit history. The problem is, private mortgages are more expensive. This is because the private lender takes on more risk, and needs to be compensated in the event that the loaner stops paying. Interest rates can be 5-6 times higher than those of a regular mortgage, and that’s why private mortgages are usually just short term solutions. Typically, they only last 1 to 3 years. They give the person lending a good opportunity to build up their credit. However, that’s not the only reason you may want to go for a private mortgage. For example, you could be:

•    Self-employed. Self-employed workers may find it more difficult to prove their income to a traditional mortgage company. Plus, they are likely to have a less steady income, since projects vary from month to month.
•    Buying a mobile home or a mini-condo. These types of property are typically not accepted by big mortgage companies.

earnest money

Advice for First Time Homeowners

Most mortgages require a down-payment to set up. Once you’ve gone through with buying your home- the earnest money you placed during your offer is usually put towards this down payment.

If you are a first-time home buyer, partnering with a real estate agent will help make sure things go smoothly. It eliminates a lot of your responsibilities and prevents (sometimes costly) mistakes from being made. A real estate agent can advise you on how much to offer for a property, and check that you’ve got your affairs in order. Real estate agents can also help you locate a home that’s right for your needs- and within your budget. Property is one of the biggest investments you’ll ever make- so it makes sense that you seek professional advice.

Buying a home can be overwhelming and seemingly difficult. It’s easy to get scammed as a first-time buyer or fall into common mistakes. We hope that this article taught you some useful knowledge on earnest money in the real estate world so that you can feel confident making an offer on your first property. With the right preparation, you can invest in something that will benefit you for years to come.

Having a Pride Home Warranty can get you a covered  repair hassle free. Call us for more information at 1855-774-3388  or  GET A FREE QUOTE

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