Buying a house involves paying some fees before your mortgage payments even begin. It’s common to be a little confused about what money goes where, with the earnest money deposit being one of the most mystifying fees in the home buying process. Here’s what you need to know about your earnest money deposit before you take the steps to buy a house in Southern Maine.
What is the point of the earnest money deposit?
The reason you have to write this check at all is to show that you are serious – or “earnest” – about your offer to buy the home. This is to discourage buyers from putting offers in on several houses at a time, only to back out after the sellers have already started the steps to take the house off the market.
This check is not cashed by the seller right away. Instead, it is usually held in an escrow account until you close on the home. At that point, it can be applied toward the total, so it’s essentially put toward your down payment. In this way, the earnest money deposit is not technically an extra fee, since you will get credit for the payment in the future.
What happens to the money if you don’t get the house?
If the seller ends up rejecting your offer – maybe because he or she got a better offer from another buyer – you get your earnest money deposit back. That’s why the seller can’t cash the check right away, because there is a chance you would get it back anyway. You will also get the money back if the seller does not meet all the terms of the contract, such as if the inspection reveals a problem that the seller refuses to fix, and you don’t go through with the purchase.
In some cases, the seller gets to keep the money even if you don’t get the house. For example, if you change your mind and pull your offer on a Southern Maine house for sale without a good reason, you lose your earnest money deposit. If you don’t meet certain deadlines for finalizing your home loan, and the deal is pulled, you could lose your earnest money deposit, too.
How much should your earnest money deposit be?
In most cases, the check you write should be for about 1% to 2% of the price of the home. It depends on the circumstances, though. If you know the seller has gotten a few offers and you really want the house, you might consider increasing the amount of your earnest money deposit. This might sway the seller to choose your offer, and since the amount of the check will be applied to your down payment, you won’t actually be increasing the total cost of the house.
The earnest money deposit is just one complex aspect of buying a house. If you are interested in buying a home in Southern Maine and have questions about the process, please contact me today.