As a buyer, it is exciting when you finally find a home that you are ready to write an offer. Whether it is a home for sale in Locust Grove, King George, or Spotsylvania, as part of the offer your Realtor® will consult with you about how much you would like to offer as an earnest money deposit. But, what exactly is an earnest money deposit? Who is that money for? Where does the earnest money deposit go?
What is an earnest money deposit?
When your Realtor® writes a contract on a home that you want to purchase, typically the buyer agrees to put about 1% to 3% down as an earnest money deposit. This deposit shows the seller that you are serious about purchasing the home. As a buyer you will only put this money in an escrow account (your agent will be able to give you specific directions on how to do this) once you and the seller have a signed contract. You do not have to put any money down if your offer is not accepted.
Where does the earnest money deposit go as my purchase moves ahead?
The earnest money is held in an escrow account. Typically title companies will hold the money. Then, at the closing, the earnest money is applied to the purchase of your home.
Why would a seller want an earnest money deposit?
The earnest money deposit is meant to help protect the seller. They take their home off of the market once you have a signed contract. During that time they are acting in faith that the buyers will complete all of their inspections and move forward with the contract. While the home is in this home buying process stage, sellers continue to pay mortgages and other house bills. If a buyer would just suddenly decides that they don’t want the home or want to purchase another, then the seller has just lost time on the market and other potential offers.
Will I lose my earnest money deposit if I decide not to purchase the home?
The answer to this question is very specific to your contract since there are protections in place for both the buyer and seller. For buyers, contracts offer opportunities to exit the agreement. For example, the buyers and sellers can’t agree on repairs after a home inspection is completed. In these cases, the earnest money is typically returned to the buyer. However, there are rare cases where a buyer just gets cold feet and refuses to go to closing (despite having completed any contingencies in the contract such as the home inspection, appraisal, or financing). In these cases, the sellers may be able to keep the earnest money deposit. Specific questions concerning this topic should be directed to your real estate agent or attorney as they will be able to give you guidance relevant to your situation.
I’m ready to buy a home. When should I have the earnest money deposit saved?
Now! If you are pre-approved for a mortgage then you know what price range of homes you are looking at; since the earnest money deposit is about one to three percent of that cost, you can calculate how much you need. Have this amount saved and ready to go so that when you write an offer you know that you can provide the deposit.
