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Earnest Money Deposit

When putting an offer on a home, you will be required to deposit earnest money after getting an accepted offer.  This deposit lets the seller know that you are serious and that you have the financial capacity to follow through on the purchase.

The basic idea of an earnest money deposit is to be a type of insurance option for a seller. It is important to remember that the escrow process can take 30 to 60 days, and during that time their property is off the market.

Many homebuyers want to know how much they need to put down for their earnest money deposit.  There are various factors that will determine the actual amount.  Typically, the larger the amount of the deposit the more the seller will consider the buyer as capable.  Earnest money deposits tend to be less during slow markets and more when the market is more geared towards sellers; there is no set requirement. Keep in mind you want to make a large enough deposit so that the seller will take your offer seriously, but of course not so large that it will be a strain on your budget.

If a Buyer is getting 100% financing and asking the Seller to pay their closing costs, a Seller might expect to see a smaller deposit.  A Buyer can be very capable of obtaining a loan for the home purchase, but may not have saved any money.  Sellers are smart to keep this in mind and not be overly critical about lower earnest money deposits in this situation.  A Buyer is also paying for inspections and an appraisal, and if they didn’t save much money, this is still quite a financial commitment.

The earnest money deposit essentially compensates the seller for this time in the event the buyer is unable or unwilling to complete the purchase for reasons outside of the contingencies name in the contract.

Who gets the money?

The earnest money deposit should always be made to a reputable third party such as a well known real estate brokerage, legal firm or escrow company.  Never give an earnest money deposit to the seller, as they may disagree if earnest money should be returned. It is vital that you also verify that the third party will deposit the funds into a separately maintained trust account. Always obtain a receipt, as a lender will need proof of payment.

Is the money refundable?

Generally speaking, yes.  Be sure to review your real estate contract as it will indicate if your deposit is refundable.  If you terminate a transaction based on findings during an inspection period or a due diligence contingencies, you will receive your earnest money back.  Your offer should be written in a manner that protects your rights to the earnest money deposit.

If you make a deposit and are making a purchase in “Good Faith,” and following contract deadlines, you should get a refund.  However, if you decide to move to the San Juan Islands and terminate your contract, you were not making an offer in good faith, and will likely be forfeiting that earnest money deposit because you have wasted the Seller’s time.

If your money is refunded, you may not receive the entire amount. Often, third-party fees are paid out of earnest money deposits. For example, if an appraisal has been completed on the property, then the appraisal fee is going to have to be paid before money can be released to either of the parties. Laws vary by State, as some states have laws requiring the buyer and the seller to agree on the disbursement of these funds before they are refunded, which can lead to further problems and legal action.

Sellers sometimes want to keep the earnest money because they feel like they have been mistreated by a Buyer.  However, the contract will be the deciding factor.

In a successful transaction, when the sale closes, the earnest money deposit is often credited towards the down payment or refunded to the Buyer.

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If you make a deposit and are making a purchase in “Good Faith,” and following contract deadlines, you should get a refund. However, if you decide to move to the San Juan Islands and terminate your contract, you were not making an offer in good faith, and will likely be forfeiting that earnest money deposit because you have wasted the Seller’s time.


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