& Insights - The Earnest Money Deposit
offers to buy a house are accompanied by a check. This check
is generally referred to as the "earnest money deposit."
The basic reason for the deposit is to impress the seller
that the buyer "earnestly" intends to purchase
The amount of the deposit varies from purchase to purchase,
depending on a variety of factors. If a property generates
a lot of interest, a buyer may make a larger deposit to
convince the seller that their offer is stronger than the
others. During "hot" markets, deposits are generally
larger than during slow markets.
In normal times, buyers should hesitate before making a
deposit that is larger than two percent of the purchase
price. Underwriting guidelines sometimes require strict
documentation of such deposits. A buyer may often be required
to show a bank statement just prior to the date of the check,
plus evidence that the check actually cleared the bank.
If you're closing quickly, this might require a trip to
the teller window at your bank.
There are reasons to try and keep the deposit as small as
possible, but not so small that the seller doesn't take
it seriously. You see, once a buyer and seller agree to
terms, the earnest money deposit is usually placed in a
"trust" account. At that point it is no longer
the buyer's money -- it belongs jointly to the buyer and
Almost all deals close and the earnest money funds are applied
to the buyer's down payment and closing costs. As the saying
goes, however -- there are exceptions to the rule.
Some sellers think that if the deal falls through, the earnest
money deposit is automatically forfeit. Some buyers think
that if the deal doesn't close, they automatically get the
Neither one is true.
Even when the failure to close is the buyer's fault, the
seller doesn't have a "right" to the deposit as
a way to "punish" the buyer. Nor does the buyer
automatically get the entire deposit back, even when they
are not at fault.
First, there are normally a small amount of cancellation
fees that must be paid. These fees are collected from the
deposit. Second, since the deposit is held in trust, both
the buyer and seller must agree on the disposition of the
funds. This is a quirk of law in most states and the real
estate agents and their companies have no control over the
If something goes wrong very early in the deal, the seller
normally understands and the deposit is usually returned
to the buyer without a fuss. When things go awry later in
the transaction, both parties usually exercise common sense
and negotiate a fair solution. In a few rare occurrences,
the buyer and seller find it difficult to agree.
The point is that is always makes sense to reach an agreement.
Failure to agree ties the money up for awhile, could possibly
lead to further legal action and inconvenience, and it just
becomes a frustrating mess for both sides -- more so than
you realize at the time.
Serious problems are the exception, not the rule. Most "challenges"
are routine to a qualified professional real estate agent.
The situation may be new to you, but the agent may have
dealt with it many times in the past.
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