Making an Earnest Money Deposit

When an offer is made on a house, it usually accompanied with a check. This check is what is known as an earnest money deposit, made to let the seller know that the buyer is earnest in his or her attempt to purchase the home. An earnest money deposit distinguishes serious buyers from those who aren't so sure about the purchase.

The deposit amount is different from one purchase to the next. Many factors can sway the amount of the deposit. In seller's markets, earnest money deposits are often larger than in buyer's markets. This is because properties tend to have more inquiries in seller's markets. Thus, it takes a little more to convince the seller to accept a certain offer.

In a steady or buyer's market, you shouldn't make an earnest money deposit in an amount that is greater than 2 percent of the offer price. Once you have reached an agreement with the seller, the earnest money deposit is placed into an escrow account where it will stay until closing. At this point, both you and the seller jointly control the money. Usually when the deal closes, the deposit is applied to your down payment and closing accounts.

What happens if the deal falls through for reason? This is where sellers and buyers often disagree. Sellers sometimes feel that buyers should forfeit the earnest money deposit and they should receive the money. On the other hand, buyers contend that it was their money in the first place and the earnest money deposit should be returned to them.

Before anything can be done with the funds, any cancellation fees that apply are taken directly from the earnest deposit. After that point, the buyer and the seller must come to an agreement on what should happen with the deposit. It really doesn't matter who's at fault for the deal going wrong, since the money is held in a third party escrow some sort of compromise must be reached before the funds will be released.

The escrow can only release the funds when one of two conditions have been met either both parties provide a written authorization or an order is issued from a court of law. Obviously it is less costly and time consuming for the two parties to reach an agreement.

In some states there is a statute of limitations on which the escrow can hold the money without receiving a release authorization from the buyers. After this time period has expired, the law requires, in most cases, that the deposit be returned to the buyer.

As the buyer, it is important that you include stipulations in the sales contract that dictate when the money should be returned to you. For example, if there are problems with the inspections, title search, or some other function that causes the deal to collapse.

Until the offer has been signed, you shouldn't give the earnest money deposit to the seller. Otherwise, if something goes wrong with the deal, you could find yourself in a situation where your earnest money deposit is held by the escrow and you cannot reach an agreement with the seller.

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