Embarking on the journey towards homeownership involves many steps and financial considerations even before you commence the actual hunt for your dream home. For many, this includes working diligently to bolster their credit score or clear any existing debt. Yet for others, prioritizing savings for a down payment and the earnest money deposit takes precedence.
Unraveling the Mystery of Earnest Money
In your quest to secure a new home, you might encounter diverse views regarding the amount you should save for your down payment, closing costs, and other related expenses. However, earnest money—a cost often overlooked by prospective buyers until the moment an offer is made—could become a significant factor in your financial preparation.
Often dubbed as the "good faith deposit," earnest money is an upfront payment demonstrating the buyer's sincere intention to purchase the property. Generally, this deposit ranges from 1-5% of the home's purchase price and is typically held in escrow by either the title company or closing agent.
In a competitive seller's market, characterized by limited housing stock, you might need to offer an above-average earnest money deposit to stand out from other buyers. Your real estate agent can provide more insights about the dynamics of your current market to help craft a competitive offer that appeals to sellers and their agents. It's worth noting that earnest money is not an additional expense—it will be applied to the buyer's down payment or closing costs at closing. However, this payment is often required when the offer to purchase is made, rather than at loan closure.
Decoding the Journey of Your Earnest Money
Your earnest money deposit is usually placed in an escrow account to secure the "good faith" deposit until the deal concludes. Although homebuyers can set up this account, the task is commonly managed by their real estate agent. Upon the successful closure of the housing transaction, the earnest money is applied toward the down payment and closing costs.
As a homeowner, you might establish a separate escrow account as part of your overall monthly mortgage payment with CrossCountry Mortgage. This is particularly common for mortgages with a down payment less than 20%, where lenders often require that taxes, insurance, and any mortgage insurance be included in the monthly mortgage installment payment. When you make your mortgage payment, the money is divided among several categories:
- Principal and interest on your mortgage
- Property taxes
- Homeowners insurance
- Mortgage insurance
Note, however, your escrow account does not cover utilities, necessary home repairs, and HOA fees. To understand more about the role of your escrow account post-closing, click here.
What Happens When the Sale Doesn't Go Through?
Your earnest money deposit can be refunded under certain circumstances if the sale collapses or an unforeseen issue arises post-contract. Here are some scenarios where the buyer is typically eligible for a refund:
The buyer's house doesn't sell in time: If the sale is dependent on the buyer selling their existing home to fund the purchase, a delay could jeopardize the entire transaction. In such a situation, the buyer could retrieve their earnest money, provided the contingency was stated in the purchase agreement. Consult with a licensed Mortgage Advisor at CrossCountry Mortgage to learn more about these practices.
Home inspection reveals significant issues: Although a home cannot technically "fail" an inspection, any major problems, like foundational cracks or roof damage, can spark negotiations on the sale price. If both parties can't agree, the buyer may opt to retract the offer and reclaim their earnest money.
Appraisal falls short: An appraiser, who represents the lender, is different from a home inspector and seeks to estimate the property's fair market value. If the appraisal is lower than anticipated, the buyer may negotiate a price closer to the appraised value. If the seller refuses, the buyer has options to discuss with the lender. In worst-case scenarios, both parties might prefer to cancel the sale.
Seller terminates the deal: If the seller decides to withdraw from the sale for any reason, the buyer is typically entitled to receive their earnest money back.
Whether you are seeking a home loan today or just planning for the future, our team at CrossCountry Mortgage can assist you. Connect with a licensed Mortgage Advisor for a free consultation using the form below.
Please note, these are just a few circumstances that may result in a refund of earnest money. For more comprehensive advice, please consult with a licensed professional.
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