What is Earnest Money?
February 4th, 2008 Categories: Buying a Home, Real Estate Tips
When making an offer to buy a home in North Carolina, it is customary for the buyer to offer something called earnest money. As a home buyer, it is very important for you to understand the benefits as well as the risks before you write that check!
What Is it?
Earnest money is just what it sounds like. It is money presented with an offer that proves to the seller you are serious about buying their home. Typically it goes into the trust account of the listing agent’s firm and is held in escrow until closing.
If all goes well, and closing takes place as planned, the earnest money is simply credited to the buyer’s side of the transaction. This money is not a fee, but rather an advance payment towards the purchase price of the home.
How Much is Enough?
I’ve always been told that the earnest money should be between 1-3% of the purchase price. So, the earnest money deposit on a $200,000 home purchase should be between $2,000 and $6,000.
If we are making an offer on a new construction home, many times the builder has a required amount. Be careful with the terms of earnest money on new construction. If the builder is not using the standard North Carolina contract, this money could be non-refundable.
The Risk
When using the standard NC contract, earnest money is only at risk when the buyer breaches the contract. If you just change your mind after signing a contract, and refuse to close, your earnest money could be at risk. Other ways to put your earnest money at risk include not providing proof of loan application on time, or failing to close without providing proof that your loan was denied, through no fault of your own.
Competitive Advantage
There is a strategy behind determining the amount of the earnest money. If you want to make your offer more appealing, compared to competitive offers, more earnest money is a way to do this. I have had offers accepted in a competitive situation more than once because we offered a higher earnest money amount. Keep in mind that this money is only advance payment on a home you intend to buy anyway.
Even if there is not a competitive bid, a larger earnest money amount can make a lower offer look more attractive to the seller. The bottom line is that a larger earnest money amount could contribute to a lower overall purchase price.
