Earnest Money Contract
What do you need to know about earnest money contracts when you're buying a house?
What is earnest money?
Earnest money is a deposit given to the seller of a property, his agent or to the third-party escrow agent by the buyer. It is offered at the signing of the sale agreement to show that the buyer is serious about purchasing the home and is making his offer in good faith. When the sale goes through, the earnest money becomes part of the total down payment. However, if the sale does not go through, it is forfeited unless a previous agreement states that it will be refunded.
How much earnest money do you need?
There is no set rate. Any amount from $1 to thousands of dollars can be used. It could be anywhere from 0.5 to 1.5 % of the price of the property, depending on the buyer's level of interest in the home. Be certain that you have a significant interest in the home before offering any money in earnest. Give as little as possible, but enough so that the seller
knows that you are making a sincere offer.
How do the interested parties negotiate the amount of earnest money?
Sometimes whether or not the sale goes through has nothing to do with the buyer. For example, the lender rejects the loan or the seller decides to keep the property. It is, thus, in your best interest to make sure the sale agreement states that this fee is refundable if the sale doesn't go through.
However, it is obviously to the seller’s advantage that the deposit be non-refundable. This assures the seller that the buyer’s intent is good. The earnest money will help offset loss of time in finding a buyer if the sale falls through. A compromise would be to set conditions on refundability. For example, a condition of refundability could be that if the seller changes his mind, the money is refunded, whereas if the buyer changes his mind, it is not. Whatever the amount, be sure that it can be justified to the seller. Remember, the seller has no way of knowing your true financial position, and will question your motives if the amount seems too small. Some justifications include wanting to hold your cash to collect interest and keeping some of your cash to make other offers at the same time. Make sure you don’t let the seller know that you can’t pay any more money and don’t ever let the seller think you have any doubts.