Earnest Money - Do you know what it is?
"What is earnest money when buying a home?" This question is very common among first-time home buyers. Not only have I been asked this question by the first-timers, but I have been asked by home sellers as well. Most likely it's because they had forgotten they, too, had to hand over earnest money when they bought their home. Earnest money is important to both the home buyer and the home seller. In this article, you will find out what earnest money is, as well as how to protect it. Read on to be fully educated about what earnest money is when buying a home.
What is earnest money?
Earnest money is one of the first requirements to buying a home. When a home seller accepts an offer from a buyer, the house goes into "under contract" status and is then removed from the market. The earnest money deposit tells the seller you are a serious buyer when making your offer. It is not considered a 'down payment,' but when it's time to sign on the home the earnest money will count towards your down payment or closing costs. When you prepare to make an offer on a home, your REALTOR® will ask how much earnest money you would like to give.
In Utah, the earnest money amount can vary. Some buyers may choose to do a percentage of the purchase price, where other buyers might choose a flat dollar amount. To give you an idea, I usually see a flat $500 or $1000 earnest money deposit. You can, however, go as little as $100 (or less). However, when looking to buy a foreclosure or short sale, the banks may ask for a minimum of $1000 in earnest money. Cash buyers usually make a larger deposit. Keep in mind when choosing the earnest money deposit amount, it can make or break the offer.
There are times that you might not be the only home buyer putting an offer on a home. Sometimes that earnest money deposit could be the deciding factor. Who wants the home more? The home buyer with the higher earnest money deposit and a good purchase price. (Another good idea is to send your pre-qualification letter from your lender along with your offer. That will show that you have at least spoken with a lender to get things going.)
When does the earnest money need to be given?
In Utah, you have two options of when to hand over the earnest money.
1) You can give the earnest money to your REALTOR at the time that you write the offer.
2) You can wait until the offer has been accepted between both you as the buyer and the seller.
If you choose the latter of the two, you must give the earnest money to your REALTOR within four (4) calendar days after acceptance. The Brokerage will then have four (4) calendar days in which to deposit the earnest money.
What form of payment does my earnest money need to be?
You can pay your Earnest Money in the form of a cashier's check, wire transfer, or personal check. Cash is not advised, as you would want a form of 'receipt' to track the earnest money deposit. In fact, lenders won't even accept your earnest money deposit if you have given it in cash form. They want to see where the money is coming from. Don't use a credit card. Doing that could affect your debt to income ratio (Actually, how about you just freeze all your credit cards in ice until you have become an official homeowner).
You may want to ask your lender how they would prefer you to pay your Earnest Money. Some loan types want to see exactly where the money is coming. If you show a deposit into your checking right before you write the check, you may have to write a letter explaining where the money came from.
Where does the earnest money go?
In Utah, the earnest money is usually given to the buyer's Real Estate company. The Brokerage then deposits the earnest money into the Brokerage Real Estate Trust Account. It is then held there until the closing of the sale.
There are times when the earnest money is to be held in escrow at the title company. This may happen when the seller is a bank or company selling the home as a foreclosure. It will just depend on what their guidelines are.
Can I get my Earnest Money Deposit back if I cancel the deal?
Sure, you can. Just be certain you have followed all your deadlines. The Utah Real Estate Purchase Contract includes contingencies. You will choose which ones you would like to apply to your offer. When you make an offer on a home, you should always include contingencies in the offer.
The first one would be to complete your inspections. This is called the 'due diligence' period. In your offer, you will have specified a date that you will complete your due diligence by. The due diligence is usually about a 14-day window from when you wrote the offer. Before you due diligence deadline you will be able to:
- Go over the Seller's Disclosures.
- Have a Home Inspection.
- Complete any additional tests and evaluations.
- Check into the costs of Homeowners' Insurance & Utilities.
- And many other items you can look into before the deadline.
If you have an issue with any of your findings, you must bring it to the seller's attention before the deadline. You can do this by either asking if the seller will make the needed repairs, or simply cancel the contract if it is something that can not be worked out. If you must cancel the contract due to your due diligence, then you will get your earnest money returned if you cancel before the deadline.
Another contingency would be the buyer must be able to obtain financing (if not paying cash). In your offer, you will have a financing and appraisal deadline. For a lender to give you the funds for the home, it must appraise for the amount offered. If the appraisal comes back lower than the offered price, a few different options can occur.
- The purchase price can be adjusted to the appraised value, as long as both buyer and seller agree.
- The buyer can choose to pay the difference over the appraised value with separate funds because a mortgage lender won't lend over the appraised value.
- Buyer or seller can challenge the appraisal by showing proof of comparables. Another appraisal may be ordered, but there is no guarantee the appraised value will be higher.
- Or the purchase can be canceled because buyer and seller couldn't come to terms on the appraisal. Again, if it is canceled before the deadline, the earnest money will go back to the buyer.
Besides the appraisal needing to come in at the purchase price, there is still the financing contingency. Although a buyer may be 'pre-approved', there is still a chance that the buyers could be denied for the loan. There could be discrepancies in the information the buyers provided to the lender and the verified information from the documents provided. Other issues may be a changed in employment, or credit card balances or the buyer may have decided to purchase a new car (bad idea, people...BAD IDEA!). If any of these changes occur, it could affect their debt to income ratios causing the buyer not to qualify for the home anymore. If the buyer cancels the contract before the deadline due to financing, the earnest money will go back to the buyer.
What if I am getting a loan that is 100% financing. Do I still need to provide Earnest Money?
The answer is yes. Luckily, there are still 100% financing mortgages making homeownership possible for those with little or no down payment. There are VA loans for active military and veterans who want to buy without making a down payment. There are also USDA loans for the rural areas. Fortunately, most of Box Elder County is still considered a rural area, making this loan program very popular in our area. There is also a Utah Housing loan program available to provide affordable housing for low and moderate income buyers.
Even though these loans are 100 % financing, you must still show you're a serious buyer and offer an earnest money deposit. It will provide the seller with the comfort that you do have some money in your pocket, and can afford to buy their home. When you close on the home, your earnest money deposit will be applied to your closing costs, or it may even be credited back to you and given back in the form of a check or wire at closing.
When you are ready to start looking to buy your first (or next) home, be prepared to provide earnest money when you make the offer. Be fairly certain that the home you are looking to invest in is the right one for you before you offer up the earnest money.
However, don't let the thought of handing over earnest money scare you. Keep in mind that you do not have to know everything about the home when you first offer. That is why there are deadlines written into the real estate purchase contract so that you can look make your inspections.
Working with an awesome real estate agent is an important part of the buying process as well. A great Realtor will keep you informed of your deadlines and ensure that you are completing all the necessary tasks within your time frames.
If you are looking for a real estate agent in Northern Utah that will provide you with great customer service and care, then give Minh Duong and Angela Duong a call at 435-225-3153 or 435-225-5200. 'You can't go wrong using Duong!'
Here are some additional links to more information you may find useful:
What Comes After a Seller Accepts your Offer? via Ryan Fitzgerald
20 Important Mortgage Terms to Know via Paul Sian
Things to Consider About a Neighborhood When Buying a Home via Anita Clark
Top 5 Reasons A Mortgage Is Denied After Pre-Approval via Kyle Hiscock
Mortgage Pre-approval vs Pre-qualification via Bill Gassett
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The above article Earnest Money - Do You Know What It Is? was provided by Angela Duong. Angela can be reached at email@example.com or by phone at 435-225-5200. With over 10+ years experience, if you're thinking of selling or buying, I would love to share my marketing knowledge and expertise.
Angela Duong is a Realtor® assisting buyers and sellers in Northern Utah. Particularly in the towns of Bear River City, Bothwell, Brigham City, Corinne, Deweyville, Elwood, Fielding, Garland, Honeyville, Howell, Mantua, Perry, Plymouth, Portage, Riverside, Snowville, Thatcher, Tremonton, Willard, and it's surrounding areas.
"You can't go wrong using Duong!"