Earnest Money Is Not A Fee
Earnest money deposit is an up front cost that is required when buying a home. When making an offer to buy a home in North Carolina, this is quite possible the first money a home buyer invests in his or her new home. 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 funds 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, it 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?
Traditionally, the earnest money deposit is between 1-3% of the purchase price. So, the amount on a $200,000 home purchase would 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 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 real estate 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 funds could be at risk. Other ways to put your 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 optimal amount. 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 these funds are 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.
