An earnest money deposit is money that a buyer puts forth, to guarantee their contract on a property. The earnest money shows that the buyer is serious...so serious they are putting their own money on the line.
Earnest money goes toward closing costs or down payment at settlement. However, if all the buyers closing costs are covered by the seller, and the buyers is purchasing the home with a rare 100% financed loan, it is possible for the buyer to receive a refund at settlement. However, the buyer can never get more money back, than they orignally put down in their earnest money deposit.
For example, the buyer puts down $2,000 earnest money with a contract for a $200,000. (Traditionally, the earnest money deposit is 1% of the proposed sales price...or close to that amount.) The seller has agreed to give $6,000 in closing cost assistance to the buyer. The closing costs end up being $5,800. The buyer can only receive a refund of their orginial $2,000. The extra $200 of the closing cost assistance offered by the seller will be lost if not spent on closing costs, or prepaids. A good lender, and good Realtor, never let that excess money go to waste. (Read about closing costs and prepaids here.)
Earnest money can also be lost if the buyer ends up in default of the contract. You can read about that here.
In a Northern Virginia Short Sale, buyer and seller can mutually agree to deposit the Earnest Money after Short Sale Approval. From the Seller's standpoint, it is ill-advised and asking a Buyer to continue house hunting. Obviously, from a Buyer's standpoint, it is preferred.
Chris Ann Cleland, Associate Broker- Licensed in Virginia, GRI, SFR, Northern Virginia Short Sale Specialist. Affiliated with Long & Foster, 7526 Limestone Drive, Gainesville, VA 20155. To contact Chris Ann, call 703-402-0037 or email chrisann@LNF.com. Or you can visit her website: www.nvarealestate.net.
Header is a combination of photos from the Bristow, Gainesville & Haymarket areas, taken by Chris Ann Cleland.
Chris Ann, up here the amount is totally negotiable, but is usually around 5% of the offering price. It's important to be earnest!
Pat: There is no set amount here, but with first time buyers, 1% is generally acceptable. More is always appreciated by the sellers.
Chris Ann, great point that the earnest money is fully at risk if the contract goes into default.
Gary: Default and earnest money are some of the hardest things for first time home buyers to understand.
Most buyers in CA put down somewhere between 1,000 and 3% of the purchase price. Our Liquidated Damages clause in the purchase contract, if initialed by both sellers and buyers, prevents the seller from coming after the buyer for more than the earnest money deposit in the event of default.
Elizabeth: A very important clause to point out to nervous first time homebuyers.
Very good information here, I hope ALL buyers read it. This is an often overlooked item that tends to get lost in the heat of the moment, but proper planning will ensure this never happens. Very well written as well - concise and factual.
Chris: I thought so. I try to write just as I would talk to a buyer. There is sooo much to cover with first time buyers. Having this as a forum really helps.