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All You Need to Know About Earnest Money Deposit

By Sadiya Anjum

An Earnest Money Deposit is usually a small sum offered by the buyer which shows his intentions of buying the property. When you are ready to make your offer, you provide proof of the earnest money deposit or ‘good faith deposit’ to the seller. Although this is not mandatory it is commonly practiced to show the seller that you do actually intend to buy the property.

The first issue to tackle with is the amount you are going to pay. There is no fixed stipulation regarding this and can vary from $500 to $5000 depending on the purchase price of the property. Technically the deposit should not exceed more than 2% of the total purchase price. What you must consider is the size of the sum – too little and the seller is not going to take it seriously especially if there are other buyers bidding for the property, you may lose out to them. Too big an amount is a risk; if there are hitches with the deal then problems may occur in receiving the money back. Another problem is if you are obtaining a loan with little or no down payment, the lender may raise eyebrows about a huge sum serving as earnest money deposit.

An extremely important point to consider is where the money will be held. Offering the money directly to the seller in case of for-sale-by-owner homes is a big mistake. This is prevention against the seller spending the money or refusing to return it in case the transaction does not actually occur. Ideally the deposit should be held in a trust fund by a neutral party – a title company or buyer agency or any other third party. This amount is usually released on the closing day.

The third aspect of an earnest money deposit is protecting this money. If the deal falls through or you decide to pull out, the deposit is dispersed according to the terms of the contract. Generally problems may occur in case there is a financial hitch, an inspection fails, or any specific problem arises causing you to pull out of the deal. If these contingency clauses are not specified and you pull out, you stand the risk of losing the money. Therefore consider all the ‘ifs’ that may occur and protect your self from losing the money.

If a deal has failed, then only a signed document by both the buyer and seller can release the money or a court order specifying the same. If a dispute arises, check your contract and hire an attorney to see you through this issue. If a seller sees the problem as a serious breach of contract, then he may force you to buy the home or sue you for additional damages. So ensure that the contract drawn up protects you from all possible causes that may lead you to lose the deposit.

Before you make the earnest money deposit, learn about the entire procedure and stipulations dictated by your state. Determine the amount, where you are going to hold the money, when it will be released and details indicating the discharge of amount if anything goes wrong. Follow the procedures diligently, protect your self with the sales contract and odds are that everything will go smoothly.

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