The home-buying process is risky for buyers and sellers, so the realty industry has developed safeguards to ensure everyone comes out of the process with as little issue as possible.
One of these is earnest money, a way to protect both parties should there be issues with the sale. A third party will hold this money between signing the purchase contract and finishing the inspection and appraisal; it can then be put down toward closing costs or the down payment.
When you work with District Lending, we’ll guide you through every step of the mortgage process; you’ll also have plenty of help from your realtor and lender regarding earnest money.
What Is an Earnest Money Deposit?
Earnest money is a good faith deposit on the home held by an escrow company, such as a title company, or a neutral third party, like a law firm. You can think of it like a deposit, which will then be put toward the other costs of the home-buying process.
During the home negotiation process, you’ll make an earnest money offer as part of the overall purchase agreement, which will then be incorporated into the purchase contract.
The real estate purchase contract lists the purchase price, the closing date, and what needs to be done before the house can be officially sold, including inspection and appraisal.
An escrow company will hold your earnest deposit between the contract acceptance and the end of the inspection period. This protects both the buyer and the seller should something unfortunate happen during the inspection if the appraisal comes back lower than expected or if the sale falls through.
What Amount of Earnest Money Should I Expect to Pay?
While the appropriate amount varies by area, in the Arizona residential resale real estate market, 1% of the total sales price is considered a reasonable amount of earnest money.
However, your real estate agent can advise you on what is a fair earnest deposit based on general trends in your particular region of the state.
If you’re a highly motivated home buyer and can afford it, providing more than 1% earnest money during the negotiation process can make you more likely to be the lucky one who gets the purchase agreement.
Remember that earnest money sums are negotiable, but the contract sets them and should be paid upon contract acceptance.
How Do You Deposit Earnest Money?
Your earnest payment will be sent to the escrow company via a wire transfer, personal check, or certified check. It doesn’t go directly to the seller, though it may be given to the seller in certain circumstances.
Some escrow companies may not accept a personal check, only a wire transfer or certified check, so check with the title company or law firm on what form of good faith deposit they prefer.
Earnest Money: Liquidated Damages Clause
Earnest money is a form of liquidated damages, meaning it’s paid out to the non-breaching party if the sale falls through. If the buyer breaches the contract, the seller will receive the money, and vice versa.
You or the seller may decide to include contingencies in the purchase contract; common ones include an inspection and a finance contingency.
In What Circumstances Is Earnest Money Returned?
Earnest money will be returned to the buyer if these particular contingencies are built into the contract.
This is the most common contingency and is included in nearly every contract; it allows the buyer to back out if serious issues come to light during inspection. This can include:
- Mold or water damage
- Building code violations
- Structural issues
- Foundation issues
If these come up, you have several options. You can back out of the deal entirely or demand that the seller fix the home before you close on it.
Often, the mortgage lender won’t approve your home loan until these issues are all rectified.
This protects the buyer if their mortgage isn’t approved; you’ll have the earnest money returned to you. It’s not as common of a contingency as inspection stipulations, and the seller may not agree to have it written into the contract.
Appraisal Price Is Lower Than Expected
If the appraisal comes back drastically lower than the home’s purchase price, the home buyer may be able to back out and get their earnest money.
When Does the Seller Keep the Earnest Money?
There are also circumstances when the seller will get the earnest money. If the buyer decides they don’t want the home anymore or fail to meet deadlines, earnest money can be given to the seller.
It can also be provided to the seller if the buyer waives inspection and finance contingencies, only to find that there were issues with the home they don’t want to fix or their home loan wasn’t approved.
How Do You Get Earnest Money Back from the Escrow Company After Breach of Contract?
Whether you’re the home buyer or seller, if the purchase falls through, you’ll want to recoup your losses if possible. Thankfully, there’s a relatively simple process to receive the money, all based on the contract that you signed.
Review the contract: Check for any contingencies that you agreed to during contract acceptance, as these will identify who is entitled to the funds.
Notify the other party: You must provide documentation proving that the earnest money should be given to you. This includes home loan denials, inspection results, and the contract itself. You need to act within the timelines given in the contract. Otherwise, you forfeit the earnest money automatically.
Sign a written agreement: This formally nullifies the sale and can be given to the escrow company, along with proof of the reason for the failed sale, to identify who gets the money.
Provide the escrow company with the needed documentation: Send all this to the company, which will then provide you with the earnest money stipulated in the contract. The contract itself should offer details on how to do this.
Buying A Home In Arizona? Call District Lending
Whether you’re buying, selling, or refinancing your home, we’re here to help.
As a full-service mortgage broker, our expert team will connect you with sellers, homebuyers, and lenders that match your needs at no extra cost to you.