Earnest Money- just what does it have to with you buying a home?
If you’re reading this I hope it is because you are thinking about buying a home in the Tacoma, Washington area. Buying a home can be a scary process but it does not need to be. Working with a Realtor you will benefit from their professional experience. This post will help explain earnest money and what the purpose of earnest money is when it comes to being a new Tacoma home buyer.
Earnest Money is the money a buyer puts on deposit to show a home seller they are serious and committed to purchasing the home.
When making an offer on a home it is common practice for a home buyer to offer an earnest money deposit as a show of good faith. The earnest money could be lost if the buyer does not complete the mutually agreed on transaction. The earnest money can be returned if the contract cannot be completed for a number of reasons. Some examples below.
- The home does not pass the buyers home inspection.
- The buyer is not able after a good faith effort to obtain a mortgage.
- The sellers note holder does not agree to the buyers offer. (in the case of a short sale)
- The seller is not able to deliver a clean title to the property.
The earnest money in some cases will not be returned. Some examples below.
- The home buyer simply decided to not purchase the home after all contingencies have been removed.
- Home Inspection
- Homeowner Insurance obtained
- Title Review
- Buyer has experienced a hardship that the seller does not accept as a legitimate reason to terminate the contract.
- The buyer simply decides that they do not like the house anymore and do not want to fulfill their end of the contract.
Yes you will need earnest money even if you are buying a home for zero down. VA and USDA are both zero down loan programs. I have found that many new home buyers are confused when it comes to earnest money and these loan programs. Your earnest money can be refunded to you if your closing costs do not cost more than the seller has agreed to cover (if you have a seller who agrees to cover your closing costs) if using VA or USDA financing.
Even though you can buy a home for zero down (in theory) you still have to be able to show the seller that you are serious about buying their home. You will need to provide earnest money.
If you are using FHA or conventional financing your earnest money will count towards your down payment.
How much Earnest Money will I need to put down on a home?
The short answer is “it depends” How much money do you feel comfortable putting down on the house? The seller will be looking at the amount of money that you are willing to commit and use that to help them make a decision on how strong your offer is. With my clients I encourage them to use the following formula 1% of purchase price rounded to the nearest $500 dollars. For example you are making an offer on a home for $235,000. I would recommend a minimum of $2,500 as your earnest money. This amount indicates to the seller that you are committed to purchasing their home from them.
When writing offers on REO properties the formula can be a bit different. HUD requires you to put $500 as earnest money for homes selling for up to $50,000 For homes $50,001 and above the required earnest money is $1,00o no more no less. With Fannie Mae and Freddie Mac properties my buyers will offer $1,000 as earnest money. If the asset manage that is deciding to accept the offer feels that there needs to be more earnest money they will ask the buyer to increase their earnest money as part of a counter offer.
As you can see with the exception of HUD there are no hard and fast rules. You will need to discuss with your Realtor what a good strategy will be for your earnest money deposit.
How do you provide the earnest money?
In the State of Washington it is written into our forms provided by the Multiple Listing Service that earnest money is to be deposited within 48 hours of mutual acceptance. Usually the earnest money is held by the escrow office that will be providing the necessary escrow closing services. On other occasions the earnest money can be kept by the sellers real estate office. In either case you will be provided with a receipt for your earnest money. If your earnest money deposit is less than $10,000 it will be kept in an escrow account with other earnest money deposits. If the deposit is more than $10,000 it will be kept in a separate account and you will be entitled to any interest that accrues.
You will be required by your lender (if you are borrowing money to buy the home) to document where you obtained the earnest money(as well as your down payment). Cash is not king( for your earnest money) when it comes to buying a house with a mortgage. At a minimum you will need to show your lender that the earnest money check has cleared your bank. Bouncing an earnest money check is not advised. REO sellers often require that you provide your earnest money as a certified check. HUD requires a certified check made out to HUD and to the person buying the home. Make sure your agent knows the desired way your seller wants the funds delivered to them. If you are being given financial assistance for the earnest money you will need to provide to your lender documentation of why, where and how the money was given to you. We will discuss gift funds in another post.
Hopefully you now have a better understanding of Earnest Money and how it will impact you when you are buying your home. If you would like to read more about earnest money you can visit the following sites.
Thanks for taking the time to read about Earnest Money!
If you have any questions about earnest money of if you are looking for assistance in buying or selling a home in the greater Tacoma Washington area please give us a call. (253) 236-3544 x101