How Earnest Are You?

“If I tell you it’s going to rain, you can put the buckets on the porch.”

how earnest are youSayings such as these are often used in the south as a testimony of a person’s veracity of their word. If you personally know someone or know their reputation, you can make a decision on whether to trust them or not.

However, when a seller is dealing with a buyer, who is a stranger, they don’t know if the seller will honor the terms of their contract or not. To demonstrate their commitment to the offer terms, buyers will submit earnest money with their contract.

The larger the earnest money deposit, the higher level of commitment to the contract is perceived by the seller. If the buyer fails to close on the sale after specified contract contingencies have been lifted, the earnest money may be forfeit by the buyer submitting a large deposit of earnest money along with the contract, the seller will feel more secure that the contract will close.

Many factors often dictate the appropriate amount of earnest money deposit. Price of the home, local customs or the type of mortgage the buyer applies for all help to determine the proper deposit amount. For some parts of the U.S., 1-5 percent of the purchase price may be appropriate. For other areas, a specific amount of $1,000 up to $10,000 depending on sales price might be appropriate. Ultimately, the buyer and seller need to agree on what is the proper amount.

A different strategy is to make an initial deposit, then once the inspections and contingencies have been cleared, deposit an additional amount. So if you are offering $10,000 in total, giving half up front and half after the contingency period is complete might be acceptable.

This earnest money deposit demonstrates to the seller that the buyer is sincere in making the offer and closing on the home which, in turn, allows the seller to move forward with marking their home pending, making plans to move and handing over eventual possession of the home. Both parties want to close as soon as possible once an offer is made and adding an earnest money deposit helps to facilitate that.  The earnest money deposit also becomes part of your down payment on the home and thus lessens your mortgage amount borrowed.

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