Home Buyers always ask how much earnest money deposit they should offer. Generally, there is no set amount. In most States, contracts must contain a consideration to be valid, but that amount can be as little as one dollar. Laws in your state may be different. Keep in mind that the amount of your earnest money deposit depends primarily on your local marketplace and customs.
What is an Earnest Money Deposit?
An earnest money deposit is a good faith deposit. When buyers execute a purchase contract the contract specifies how much money the buyer is initially putting up as earnest money to secure the contract. It will also show how much down payment the buyers are agreeing to make. The balance is usually financed as a mortgage. An earnest money deposit says to the seller that you are serious about buying their house. An earnest money deposit for Plano foreclosures also shows the bank that you are a serious purchaser.
How Much Earnest Money is Enough?
Because there is no set amount, it varies from market to market and across the country. Where I work, selling Plano homes and DFW Homes in Texas, generally this amount is between 1% and 5% of the purchase price. Buyers here do not often put down more than 5% since the sales contract contains a liquidated damages clause that awards that earnest money to the sellers should they default and not close on transition. If we were in a seller's market, with many buyers fighting over limited amount of home, it makes sense for the buyer to put down a much larger earnest money deposit to entice the seller to accept their offer. In a buyer’s market, a larger earnest money deposit might entice a seller to accept a much lower purchase price.
Who Do You Give Your Earnest Money Deposit To?
In every jurisdiction that I am aware of, the earnest money deposit should either go to the Title Company or legal firm handling the closing or to the listing brokers escrow account. Review the advice below:
- Never give an earnest money deposit to the seller.
- Verify that the third party will deposit the funds into a separately maintained trust account.
- Obtain a receipt.
- It is not advisable to authorize a release of your earnest money until your transaction closes.
Is Your Earnest Money Deposit Refundable It You Do Not Close?
Study your sales contract and addenda to see what it says about what happens to your earnest money deposit if the transaction doesn’t close. The answer will depend on why the transaction didn’t close. Were you not able to get your financing approved or maybe you couldn’t get clear title to the property. Did you or the seller simply change their mind about closing? Upon cancellation, the sellers and buyers are asked to sign mutual release agreement. If an agreement cannot be reached, the party holding the earnest money deposit will continue to hold it until an agreement is reached. If no agreement has been reached after certain period of time, title companies will send the parties a certified letter asking for mutual instructions. The letter will state that if no one responds within a certain time period, then title agent will return the money to the buyer. If the seller contests the action then the parties will have to go to arbitration or court to get the issue resolved.
