Instant Home Valuation

Friday, March 16, 2012

What is "Earnest Money" and how much do you need to buy a home?


"Earnest Money" is funds supplied by the buyer (usually in the form of a check) when writing up an offer in the effort to show the seller how serious they are about following through with purchase of the home. The more the earnest money, the more the seller stands to gain if the buyer backs out. The buyers agent would submit a copy of the check along with the buyers bank pre-approval letter when presenting their purchase agreement/offer to the Listing Agent. If the offer is accepted, the check is given to the Listing Agent and then is deposited into the Listing Agents Company Escrow/Trust Account within 24 hrs of acceptance. The funds are held there until the day of closing. The day of closing a check is written by the Listing Agents Broker to the closing company who then calculates it in on the buyers closing settlement statement (the breakdown of closing costs etc). In most cases it's a credit against the amount of money the buyer needs to bring to closing, the exact use of the earnest money is up to the buyers lender. If the offer never gets to the point of acceptance, the check is never cashed and it is given back to the buyer.

Earnest money varies in each situation, but to give you an idea of what you "may" need
(Use your agents expertise to help you decide how much, details of the offer can change this amount)
Purchase price of the home up to $50,000 - Earnest Money should be at least $500
Purchase price of $50,000-$199,000 - Earnest Money should be at least $1000
Purchase price of $200,000 or more varies with each individual situation, talk to your agent for guidance.

Remember, earnest money is money the buyer stands to lose if they decide to back out of the contract for reasons other than what is noted in the contract. Not only is earnest money lost in these cases but the seller may take legal action also. (Breach of contract, loss of time on market for their home, and many other possible fees. For more information on that issue please contact an attorney.) Earnest money is returned if the buyer cannot proceed due to financing, bank letter of proof is needed if this happens.

*A good rule of thumb: Do not enter into a contract unless you plan to follow through. 

This is for informational purposes only, these are only my guidelines, other agents may have different points of view, consult your agent or attorney for guidance.

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