When Is The Deposit Due When Buying a House
Understand Deposit Money Responsibilities.
Is My House Deposit Due Right Away?
Are you going to be purchasing your first house? Do you know when the deposit is due when buying a home? If you don't, you're not alone as many first-time home buyers ask their real estate agent this question.
When you are buying a home, there is a lot to think about and remember. You need to have your financing approved by the lender, and you need money saved to pay the expenses involved in buying and owning your new home.
There are many stages you need to stay on top of in the process. Keep reading, and we'll take a look at the house deposit you need when buying a home and when it is due. Understanding earnest money deposits is one of the most critical facets of buying a home to understand.
Getting Approved for a Mortgage
If you don't have the money to purchase your house outright, you will need assistance from a mortgage lender. They will need to be given details of your income and check your credit details. The lender will make sure that you have sufficient funds available to you for a deposit, and that it comes from an acceptable source.
When they have completed these checks, they will then be able to give you an idea of how much they are willing to lend you. The term for this is a mortgage preapproval.
As a first-timer, it is essential to know where you stand financially. One part of due diligence that many real estate agents and mortgage brokers will recommend is getting a hold of your credit report. Checking for errors will be a critical exercise, as it can negatively impact your score. Of course, you want the best interest rates on your mortgage, so this exercise is a must. Buyers need to be vigilant about improving their credit score well in advance of a home purchase.
Having this information at your disposal will allow you to narrow down your house-hunting search. But you still need to have other money available to you for your earnest money deposit and down payment, which won't be covered by the mortgage. The proof will be required by the seller, that you have mortgage approval and the funds available to pay the other costs involved.
Earnest Money Deposit
So that the seller of the house you want to buy, can be sure of your intention to purchase, a house deposit is needed. Those in the real estate industry refer to the deposit as your earnest money. This earnest money deposit commits you to your offer and gives the seller some protection should you not follow through in purchasing the property.
This deposit needs to be paid around the time of the real estate purchase contract signing. The contract will state when the escrow deposit check or electronic transfer, has to be paid into the account of a third party. This is typically when the seller accepts the contract or soon after that. The funds are held in an escrow account, usually belonging to either the seller's real estate brokerage or the title company.
It is possible to negotiate when you have to pay the deposit into escrow, but if you aren't able to meet this time frame, the contract could be terminated. Depending on the details in the purchase and sale, there might be penalties for not meeting the payment date.
There are some circumstances where you can still withdraw from the deal. The purchase and sale contract will generally contain contingencies that provide for the buyer to get their earnest money deposit back. For example, if a severe problem is discovered during the home inspection and an agreement can't be reached to repair or negotiate the purchase price, a contingency could allow the buyer to have the earnest money returned.
The impartial party will hold the escrow deposit until closing or if a contingency is triggered to release the funds back to the buyer. More often than not, if there is a dispute between the parties regarding the deposit, the seller's broker will retain such a deposit until a decision is made on who is legally entitled to keep it. Typically, when a deposit dispute cannot be resolved, a court of competent jurisdiction will determine the outcome.
Real Estate brokers are often in the middle of deposit disagreements. Even if a broker has a strong disposition about one party being entitled to the deposit, they cannot release it without proper authorization. One of the differences between a real estate broker and an agent is the enormous responsibility of holding a buyer's deposit funds until closing.
It is possible, but not usual, for non-refundable earnest money to be paid. This means you won't get your deposit back if you need to cancel the agreement for any reason. A similar situation can happen if your real estate purchase contract doesn't have any contingencies to allow you to escape from the sale. This situation is only likely to take place if the market you are looking to buy in is heavily favoring sellers.
How Much Money is Needed for the Earnest Deposit?
The seller will want higher amounts to ensure buyers don't back out. However, lower sums of money present less of a risk to the buyer and can make it easier to purchase. The amount of earnest money deposit will often depend on what is normal locally and can be influenced by how in-demand housing is in the area.
More significant deposits are often required when there are a lot of buyers, and this could go up as high as 10 percent of the purchase price if the property is new construction. Usually, though, the earnest money will range from 1 to 5 percent of the cost of the property.
When you reach closing on the house, your earnest money will be used to pay your closing costs or contribute to the purchase price of the home. It is crucial to be aware of what money you need to have and when it needs to be paid. This will give you a better chance of a smooth and trouble-free purchasing process.
How Does Earnest Money Differ From a Down Payment
One of the more confusing things for home buyers is understanding that earnest money deposits and down payment are NOT the same things. The easiest way to explain the two is that the earnest money is the funds used to lock up the home. The down payment, on the other hand, is the difference between the purchase price of the house and the amount you are financing.
So, if you are purchasing a home for $400,000 and the earnest money agreed to is 5 percent, there would be twenty-thousand held in the broker's escrow account. If you are putting ten percent down to buy the home and financing ninety percent, your down payment amount would be forty-thousand.
Hopefully, you now realize that earnest money funds are not the same thing as your down payment funds.
Final Thoughts on Home Deposits
Buyers need to be cognizant that a deposit is an essential part of a real estate transaction. In most real estate transactions, without "consideration," there is no sale. Both buyers and sellers should be informed of the rules surrounding deposit funds, including typical amounts and due dates. Not having solid advice surrounding home deposits could cause mistakes and financial pain.
An excellent buyer's agent will be able to assist in keeping a buyer on schedule with their financial responsibilities.
About the author
One of the top RE/MAX Real Estate Agents in New England. A passionate writer who's work has been featured in many prestigious real estate publications including The National Association of Realtors, RISMedia, Inman News, and Credit Sesame.