When it comes time to put an offer on a home they love, many buyers will include an earnest money deposit. This demonstrates to the seller that the buyer is serious enough to put money on the line. A sizable earnest money deposit can give buyers an edge over the competition, especially in a seller’s market. But there are mistakes that buyers should avoid when it comes to the earnest money deposit. Here’s what you need to know to avoid these earnest money mistakes.
Not knowing what earnest money is
The most common mistake when it comes to earnest money is not knowing exactly what this deposit is. In a nutshell, an earnest money deposit is a percentage of the purchase price that is provided with an offer. It shows that you’re a serious buyer who is committed to closing on the home. That money is held in escrow during the closing process. Once you get to the closing table, the money is either returned or applied to closing costs or your loan.
Not offering the right amount of earnest money
It is typical to offer somewhere between one and two percent of the purchase price of the home as an earnest money deposit. But this can change depending on your local market conditions and how serious you are about submitting a winning offer. Offering too little can mean you lose out on the home. Offering too much can put you at risk of losing that money if you don’t close on the house. When in doubt, consult with your real estate agent on the best amount to put down for your earnest money deposit.
Not including contingencies
When you sign a purchase agreement on a home, you may opt to include contingencies as the buyer. These are conditions that must be must in order for the sale to proceed. If you don’t include contingencies in your contract and you back out of the sale, then you are in danger of losing your earnest money deposit. The seller will be legally allowed to keep the money. Be careful about limiting your contingencies when you’re negotiating the sale.
Not paying attention to deadlines
Once you sign the purchase agreement and submit your earnest money, you’ll be working your way toward a deadline. Most agreements will outline the closing process and will give a date for when you must close. If you don’t abide by this timeline and fail to close on the house by the stated date, then you could lose your earnest money deposit.
Not knowing what you really want
Finally, it is essential that you know what you are looking for in a home before you begin your search. Otherwise, you may end up putting in an offer on a home that doesn’t end up meeting your needs. Should you decide to rescind your offer for any other reason besides what’s clearly stated in your contract, then you’ll probably lose that earnest money. By knowing what you want, you can feel confident moving forward with an offer.