Tuesday, April 28, 2009

How earnest money works in real estate

What is earnest money deposit?
It’s a good faith deposit but no to be confused with a down payment. When buyer execute a purchase contract, the contract specifies how much money the buyer is initially putting up to secure the contract, to show “good faith”, and how much money all together will be deposited as a down payment. The balance is generally financed as a mortgage or a combination of mortgages. An earnest money deposit says to the seller: “Yes, I am serious about buying your house”.
How much earnest money?
Buyers always ask how much of an earnest money is required. Typically, there is no set amount required. The laws in every state may vary. It will primarily be driven from your marketplace and local custom. The amount of the earnest money depends on the type of property you are interested in. A bank owned may want 1%. A HUD property depends on the offer accepted, it could range any where from $500-$1500. If a seller is involved unless they request a certain amount of earnest money your realtor will advise you.
Who gets the earnest money?
Here are a few points to remember! The money is typically held in the escrow account with your agents broker. If it is a bank owned property, they may ask for the earnest money to be held with the title company that will be used for closing.
1. Never give an earnest money deposit to the seller
2. Make the deposit payable to a reputable third party such as a well known real estate brokerage, legal firm, escrow company or title company
3. Verify that the third party will deposit the funds into a separately maintained trust account.
4. Obtain a receipt
Is your earnest money deposit refundable upon cancellation?
First, read your contract. Laws vary from state to state. you may also ask your agent they may advise you to speak to an attorney. If there are contingencies in the contract and you are cancelling because one of them it is a possibility you may be refunded all of you money. Upon cancellation, the sellers and buyers are asked to sign mutual release instructions. Make sure your realtor advises you on these procedures.
How to protect yourself
Things can happen, right? If you pull out of the deal for some unforeseen reason - one not included in the contract - you’ll lose your deposit. However, the seller could also sue you for additional damages or even force you to buy the home. To protect yourself, have a clause in the offer that specifies the earnest money as “liquidated damages” if you are in default. Your real estate agent can help with the language, but this basically means that if you need to default on the contract, the seller can’t ask for more than what you have already included as earnest money.

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