What is the Earnest Money Deposit?
When buyers are making an offer to buy a house, in most cases they accompany the document with a check. This check is generally known as the "earnest money deposit." The basic reason for the deposit is to show to the seller that the buyer "earnestly" intends to purchase the property.
How much should I give as a deposit? In fact, there is no standard amount. Indeed the amount of the deposit varies from purchase to purchase, depending on a variety of factors. If a property generates a lot of interest, a buyer may make a larger deposit to convince the seller that their offer is stronger than the others. But as a rule, you should not make a deposit greater than 2% of the purchase price. Underwriting guidelines sometimes require strict documentation of such deposits. You may be required to show a bank statement just prior to the date of the check and also evidence that the check actually cleared the bank.
In general, you should try and keep the deposit as small as possible, but not so small that the seller does not take it seriously. When a buyer and seller agree to terms, the earnest money deposit is usually placed in a trust account. Once this point is reached, the deposit is no longer the buyer's money but it belongs jointly to the buyer and seller. When the deal is closed, the earnest money funds are used for the buyer's down payment and closing costs.
However, what happen if for any reason the deal is not closed? Some sellers think that if the deal falls through, the earnest money deposit is automatically lost. Some buyers think that they automatically get the money back as compensation. But both buyer and seller are wrong. First you will have to pay a small amount of cancellation fees. These fees are deducted from the deposit. Second, as the deposit is held in trust, both the buyer and seller must agree on the disposition of the funds. Both parties usually have to exercise common sense and negotiate a fair solution. There are very few rare occurrences when the buyer and seller find it difficult to agree. Most challenging situations end happily.
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