If you are planning on buying a home this year, one of the more proactive steps you can take is to, along with your Midwest Lending Mortgage Pro, determine how much cash you’re going to need on hand for the entirety of the home buying process. Because the truth of the matter is, there is a lot more to it than a simple down payment. There will likely be closing costs, and often prepaid items like mortgage insurance and property taxes.
Many of these expenses and fees charged during the buying process can be rolled into your mortgage, but there is one item that will need to be dealt with before it even starts. It is known as an earnest money deposit.
Ok, so what IS an earnest money deposit?
Earnest money (EM) is an amount given to the seller of a home by the perspective buyer, in order to prove that you are serious about purchasing their home. These deposits are generally provided to the seller at the time you submit your offer, and proves that you have the funds available to purchase the home, while you take the time to secure your financing/mortgage. Earnest money deposits act as a barrier between sellers and those buyers who tend to make frivolous offers on homes. You won’t generally make your deposit to the seller themselves, but instead to an escrow company who will hold your money securely until the sale of the home is finalized.
Just how much money are we talking?
There is no formal or legal requirement that governs how much an EM deposit must be. It should be an amount that conveys to the seller that you are serious, but by no means should break the bank. Your real estate agent can help you to determine a figure that’s appropriate for your EM deposit, but you can expect it to generally be around 1% to 3% of the sale price of the home.
But what if the deal doesn’t happen - do I get my money back??
In almost all instances, yes. When you enter into a real estate contract, that contract will detail what will happen to the EM deposit should the deal fall through. If you pull out of the home buying process for a reason covered and allowed by the real estate contract – for instance you discover during the inspection that the home has serious foundational issues that the seller refuses to correct - you will be entitled to receive your money back.
But if you pull out of the deal for a reason not allowed by the real estate contract, you may not be entitled to receive your earnest money deposit back. It then acts as compensation to the seller who now has to start all over, and list their home on the market again.
At Midwest Lending, we're here to ensure that all of your home financing questions are answered. We will walk you through each and every detail, so that you will know exactly what is in store for your home loan!