Earnest Money - How Much Is Enough?

Earnest Money - What is it?

All offers to purchase Cleveland real estate are accompanied by earnest money. This money or “check” is generally referred to as the "earnest money deposit." Typically these funds are in the form of a certified check or possibly a personal check. The basic reason for the deposit is to demonstrate to the seller that the buyer "earnestly" intends to purchase the property.

How Much Earnest Money is Enough?

The amount of the deposit varies from purchase to purchase, dependent on a variety of factors. Often more desirable properties may dictate that a serious buyer make a larger deposit to convince the seller that their offer is stronger than others. During seller’s market situations, deposits are generally larger than during other market conditions such as slow markets.

In market neutral situations, buyers should hesitate before making a deposit that is larger than two percent of the purchase price. Lender underwriting guidelines often require strict documentation of such deposits.

There are justifiable reasons why you should keep the deposit as small as possible, but not so small that the seller doesn't take your offer seriously. Once a buyer and seller agree to the terms of an offer, the earnest money deposit is usually placed in a "trust" account until closing or escrow. At that point it is no longer the buyer's money -- it belongs jointly to the buyer and seller.

What Happens to My Earnest Money Check If

At closing your earnest money funds are applied to the buyer's down payment and closing costs. There are exceptions to the rule.

Some sellers think that if the deal falls through, the earnest money deposit is automatically forfeited to them. Some buyers think that if their deal doesn't close, they automatically get their money back. Neither of these choices is true.

In the unfortunate event that a property fails to close due to the fault of the buyer, the seller doesn't have a "right" to the deposit as a way to "punish" the buyer. Nor does the buyer automatically get the entire deposit back, even when they are not at fault.

First, there are normally a small amount of cancellation fees that must be paid. These fees are collected from the deposit. Second, since the deposit is held in trust, both the buyer and seller must agree on the disposition of the funds.

If something goes wrong very early in the transaction, the seller normally understands and the deposit is typically returned to the buyer without any repercussions. Should things go awry later in the transaction, both parties usually exercise common sense and negotiate a fair settlement. In a few rare occurrences, the buyer and seller find it difficult to reach an amicable resolution.

The point is that it is always better to reach an agreement. Failure to agree ties the money up for short time, which could possibly lead to further legal action and inconvenience, and it just becomes a frustrating mess for both the buyer and the seller -- more so than you realize at the time.

Serious problems are the exception, not the rule. Serious challenges are routine to a qualified professional real estate agent like me. While the situation may be new to you, as your agent, I have dealt with these situations on many occasions. Ultimately, I want your transaction to be smooth and problem-free. This information is provided so you know in advance all of the potential scenarios so you are a smarter first-time homebuyer.

If you are a first-time homebuyer and you are ready to start your home search, contact me today for your FREE no-obligation homebuying assessment.

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