If you’re buying a home in the Summit or Park County area you will have to deal with an earnest deposit, sometimes called a “good faith” deposit. As a buyer, it’s important to anticipate this cost and understand both the risks and rewards of this very common practice. For this reason, we thought it would be useful to explain what an earnest money deposit is and how they work.
The Simple Answer
To oversimplify, earnest money is the downpayment that the buyer makes to lock in a deal with the seller very early in the process. Earnest money is given either when a buyer submits an offer when going under contract with a builder or soon after their offer is accepted by a seller of an existing home. In the latter scenario, there is a deadline written into the contract for when the earnest money deposit is due.
When a contract is fully executed by both the buyer and seller and is accompanied by earnest money, it is legally binding and gives the seller assurance that the buyer won’t back out of the deal without a valid reason.
Unless the buyer terminates the transaction per the terms allowed by the contract, they will most often forfeit the earnest money deposit. There are however a number of valid reasons for a buyer to back out of a sale. It sounds complicated, right? Let us answer some of the more common questions that we get about earnest deposits.
Who pays the earnest money?
It is always the buyer who pays an earnest deposit. Rather than paying the deposit directly to the seller, the earnest money is actually held in an escrow account with the seller’s real estate broker, the title company, or an escrow company. The money stays in that account while the parties negotiate the real estate transaction.
What will it cost?
It really depends on the market area and the price of the home being purchased. Earnest money deposits can range anywhere from $1000 to 5% of the total sales price but are typically somewhere in the middle of this range.
Can I pay with cash?
We never recommend paying your earnest deposit with cash. The best way to pay is with a personal check, wire, money order, or bank check. Speak with your Realtor about the option that works best for you!
Can I change my mind after making an offer?
Absolutely. But keep in mind, if you back out of the deal you may lose your earnest money. You should work with a Realtor who is experienced and can write the contract with appraisal, mortgage, and inspection contingencies. These are really the bare minimum but can give you a great starting point for negotiations.
When do I get to keep my earnest deposit?
You get to keep your earnest money when it falls within one of the contingencies in your contract. When you partner with an experienced Realtor they will likely include some or all of the following contingencies in your purchase agreement to ensure that you are protected during the transaction.
- Appraisal contingency. If the home appraisal comes in below the asking price the buyer can either negotiate with the seller or walk away. If they chose to walk away they keep their earnest money.
- Financing contingency. This protects the buyer if they are unable to obtain a mortgage loan.
- Inspection contingency. This allows the buyer to have the property inspected. If the inspection reveals that the home is in need of major repairs the buyer can back out of the contract.
- Home sale contingency. This allows the buyer to sell their current home before closing on their new house.
How is the deposit applied to my mortgage?
Your earnest deposit is applied as a credit to the downpayment and closing costs once the transaction has been finalized.
How Can We Help?
We hope that you’ve found this information informative. Do you have other questions that we might be able to answer for you? Let us know. And if you need buying or selling guidance or help in the Summit or Park County area please reach out! We will also continue to provide you with relevant and up-to-date information here on our blog.
If you would like more information on how the Summit and Park County real estate market is doing, you can also sign up for our detailed monthly market report by clicking this link.
Best Regards,
Scott & Anne Lindblom
Broker Associates
[email protected]
[email protected]
Scott: 970-485-4065
Anne: 608-345-2734
www.LindblomGroupe.com