When buying a home, you'll need to provide an earnest money deposit. This is a sum of money that shows the seller you're serious about buying their property. Here are some important things you need to know about earnest money (EM):
What is earnest money?
Also known as a Good Faith Deposit, It is the funds offered by the buyer to show they're committed to buying the property. The typical contract and expectation is that the funds will be deposited at the very beginning of the transaction. Usually, your first task as a buyer under contract is to deliver the EM to where the contract states it will go. Either title or to the brokerage.
Why is it necessary?
It is a way to show the seller you're serious about buying their property and compensate them for taking the property off the market while you're in escrow.
What does it represent?
It represents the buyer's "skin in the game," or the amount of money they're willing to risk losing if they do not act in good faith and follow through with the purchase.
How do you lose it?
If you fail to follow through on the terms outlined in the contract, the seller may be entitled to keep your earnest money as damages. This is also known as "failing to perform." Common reasons for losing your earnest money include waiving contingencies, such as an inspection, only to discover later that the home has appraisal conditions that aren't met. Another scenario is waiving the appraisal and discovering that the appraised value is too low to secure financing. Lastly, if you decide to back out of the deal due to cold feet or for other reasons not outlined in the contract, the seller may be entitled to keep your earnest money.
How and when do you get it back?
If the sale goes through, the earnest money deposit is typically applied to the down payment or closing costs. If the sale falls through, the earnest money deposit may be returned to the buyer depending on the terms of the contract.
What's the expected amount?
In Idaho, the expected amount is 1% of the purchase price, but the amount can vary depending on the market and the terms of the contract. Builders may require a higher earnest money amount to secure a build job.
What's the difference between holding the funds with a broker's trust versus having it held at title?
When the earnest money is held by a broker, it's kept in a trust account and protected by the broker's fiduciary duty. If a deal falls through, the earnest money must be released to either the buyer or the seller. If there's a dispute over the funds, the broker can make a prompt decision to release them. In contrast, if the earnest money is held by title, it may be subject to a longer legal process before it can be released in case of a dispute. As a buyer, it's important to get your earnest money back quickly if a deal doesn't work out. This allows you to move on to another property and make a competitive offer with earnest money readily available. If your earnest money is tied up in a dispute, it may delay your ability to move forward and potentially cause you to miss out on a new home.
How can it be used to bolster an offer?
Earnest money is an important part of the home buying process. It shows the seller that you are committed to purchasing the property and have the financial ability to do so. Offering a larger earnest money deposit than expected can make your offer more attractive to the seller, as it demonstrates your willingness to take a risk and secure the contract. Conversely, offering less than expected may signal to the seller that you haven't saved enough money to truly follow through with the purchase. You can also use earnest money to gain the seller's favor. For example, you can offer non-refundable earnest money or release the earnest money to the seller in portions or at certain dates. This strategy can work well if you need to make a contingent offer or require an extended closing time. By offering non-refundable earnest money or releasing it to the seller at certain dates, you can show the seller that you are committed to closing with them, even if you need to sell your own home first.
What is non-refundable earnest money?
Non-refundable earnest money is a type of earnest money that is not returned to the buyer if the deal falls through for any reason. This type of earnest money is usually used in situations where the buyer is trying to make their offer more attractive to the seller. By offering non-refundable earnest money, the buyer is demonstrating their commitment to the transaction and that they are willing to assume some level of risk to ensure that the sale goes through.
Non-refundable earnest money is especially common in new construction, where builders may require non-refundable deposits to secure a spot in the build job. In these cases, the first big purchase is often the floor planning with the engineer, who is paid at the time of service.
In resale situations, a buyer may choose to release their earnest money to the seller to help them make needed repairs for appraisal conditions. This can be a useful tactic if the buyer is interested in the home but the seller doesn't have the funds to make the necessary repairs. By releasing the earnest money, the buyer can help ensure that the transaction moves forward while also making sure that the home is in good condition.
It's important to note that non-refundable earnest money is a significant commitment, and buyers should only consider offering it if they are confident that they will proceed with the transaction. It's also important to ensure that the terms of the non-refundable earnest money are clearly spelled out in the purchase contract.
In summary, non-refundable earnest money can be a powerful tool for buyers looking to make their offer more attractive to sellers, especially in new construction. However, it is important to carefully consider the risks and benefits before committing to this type of earnest money. And as with any earnest money, it is applied to the closing costs or down payment at the end of the transaction.
Remember, earnest money is an important part of the home buying process. At House of Palmer, we have extensive experience working with buyers to craft the perfect offer with a strategically placed earnest money deposit. We understand the unique needs of each market and buyer, and we have the skills to negotiate terms that work for you.
Whether you are purchasing new construction or a resale home, we can help you navigate the process and ensure that your earnest money deposit is in line with your goals and the market. Let us put our expertise to work for you and help you secure your dream home. Contact us today to get started!