Buying a home is a big step, and that is especially true for first time home buyers. Therefore, it is essential to understand the purchase process, costs, and money involved. So, what is the first actual cost the buyer incurs? The earnest money deposit is typically the buyer’s first check written. Other terms for it include earnest money check, EMD, or just plain old earnest money. It is good faith money offered by the buyer to the seller and solidifies the purchase contract.
Some states, like NC, have an additional fee called due diligence. Due diligence money is a nonrefundable fee which allows a buyer to back out of the purchase for any reason during the due diligence period. Even though it is nonrefundable, it is given as a credit at closing. Well, let’s explain earnest money and how much is required.
Is an Earnest Money Deposit Required?
Earnest money is not “required” on a purchase transaction, yet it is customary. Therefore, most sellers require an EMD as good faith towards buying a home. Usually, the only transactions potentially without this deposit include low priced markets, difficult to sell properties, family transactions, or other non-arms length transactions. Either the seller is doing a favor for the buyer, or the seller is desperate for a buyer. Conversely, sellers in a hot market practically always require up-front funds.
Think about this. Going under contract means a seller takes their house off the market for 30 – 60 days. Additionally, there is a move to another residence. Often, another contract depends on this contract. Therefore, the seller wants as much confidence in this closing. There are several ways which the seller can feel better about closing on-time. Examples include a pre-approval letter, lender loan approval as early as possible, and an earnest money deposit.
But, how does a buyer decide on an amount?
How Much Earnest Money Should I Pay?
Not only is this a popular question with buyers. Realtors want to know too. Circumstances vary by market, borrower, seller’s sense of urgency, and more. Even sellers want to know how much to request. The answer is not so cut and dry. As we mentioned earlier, EMD is not required.
It is helpful to ask yourself specific questions to determine the best amount:
Questions to Ask Yourself When Making a Deposit
- Am I in a competitive situation with other buyers?
- How much risk am I comfortable with?
- Is the seller requesting a certain EMD amount?
- Will a higher EMD provide me with an advantage?
- What is customary in my market for this price?
Am I in a competitive situation? For a hot property or market, a higher deposit could make the difference. Assuming all buyers have an equal offer along with similar pre-approval letters, more up-front money could seal the deal!
How much risk can I afford? A buyer must realize that there is a risk of losing the earnest money. Which means a buyer needs to think about how this could affect their finances. Even if the loan closes, a buyer with no down payment could have a hard time coming up with a few thousand dollars. Buyers should not put undue stress upon themselves in these cases.
Has the seller stated a certain EMD? This makes it easier. If the seller states an amount, a buyer could offer that much. Although, a buyer may negotiate a lower amount. Even pay a higher amount to stand out among other offers!
Will a higher EMD Help? Absolutely! Money talks. Throwing more money at the seller makes them feel all warm and cozy about a buyer. The seller will feel confident that the buyer is serious, but don’t forget about question number two.
What is the customary earnest money? Ask your buyer’s agent for the normal amount. Typically, lower-priced homes require less EMD. For instance, $500 – $1,000 may seal the deal. Although, $500,000 homes could require $5,000 or even more for popular properties. Understanding the market helps, and this is just one of the way a Realtor can assist a buyer.
Be Prepared to Document Earnest Money
Assuming EMD is required, it is key to pay it correctly. Buyers, listing agents, and buyer’s agents need to understand this. The reason is lenders may require documentation that the funds came from an allowable source. Usually, EMD paid in cash is hard to document. Making a copy of the cash does not prove its source. Yes, some provide a photocopy of $100 bills as proof. Not only does that not prove who paid it, but it does not even show it is for this transaction.
The seller’s agent needs to look out for cash deposits when a loan is involved. Be proactive and question the buyer side.
Buyer’s agents should explain the acceptable forms of EMD. Also, pay attention to the source. Is the check in another person’s name? That’s important. So, get on the phone with the loan officer to see if this is allowed.
Do you have questions? We have answers. Call your OVM Financial loan officer for more information.