Mortgage Loans and Earnest Money Deposits
Once an interested home buyer wants to make an offer on a property, along with a contract to make the offer, the buyer will make an earnest money deposit to go with the offer.
The earnest money deposit is a good faith deposit to indicate that the buyer is serious about the offer and their intentions to consummate a transaction. The earnest money deposit is not to be confused with a down payment. The mortgage loan approval is not dependent or related to the earnest money deposit.
This deposit money is given to the real estate agent, attorney or seller at the time of the offer and if the seller accepts the offer, the earnest money is held in escrow until closing. If the earnest money is documented properly, it will generally be applied to the down payment or the buyer’s portion of the closing costs when the purchase goes forward.
If the purchase offer for the home is rejected, the earnest money is usually returned, since there is no legal contract between the buyer and seller. If the buyer withdraws the offer or does not fulfill the contract terms after the contract is properly executed by buyer and seller, the earnest money may be forfeited.
The amount of the earnest money deposit varies significantly depending on factors such as local practices in the specific market area, the price of the home, and the supply and demand for homes at that time of contract negotiations.
It is, of course, generally in the seller’s best interest to see a large earnest money deposit. With the larger deposit, the seller is in general more convinced to accept the purchase offer. This is a strategy that is more likely to be utilized in high demand markets where homes are selling at a brisk pace. In other markets, earnest money deposits of $500.00 or $1,000.00 are quite acceptable.
Understanding the market is the principal guideline for determining the amount of the deposit. Real estate professionals will all have opinions on what is a satisfactory amount, but unless the housing market has a strong demand and low supply, a lower earnest money deposit is not likely to dissuade a seller.
The buyer should have a contingency to inspect the property and withdraw the offer within a certain time frame written into the contract, with this in mind; it is in the buyer’s interest to make the smallest amount of earnest money possible. If the buyer cannot obtain a mortgage within a certain time frame, for example, the earnest money will be returned in full if the offer stated such a contingency.
To avoid any complications with a mortgage lender about the earnest money deposit and subsequent credit at the time of the mortgage loan closing, copy the check before submitting it with the contract and then copy the front and back once it clears the bank. The mortgage lender will then have ample proof that the funds deposited were the buyers and have already cleared the bank and the buyer will get a full credit for those funds as they may be applied to the down payment or mortgage closing costs at the time of settlement.