Earnest Money: What Buyers Need to Know!
What First-time Buyers Need to Know About Earnest Money
If you’re in the market for your first home, you’re paying a lot of attention to your budget and what you can afford. After taking into account the down payment, closing costs, moving expenses, home inspection fees, and home insurance, you might think you have a pretty firm grasp on your homebuying costs. However, if you’re leaving out earnest money, you’re in for an unpleasant financial surprise.
What is Earnest Money?
Earnest money is known by several different terms, including good faith money and escrow funds. The earnest money is paid after the property owner accepts your offer on the dwelling. This good faith money shows you are serious about completing the transaction. The downsides to earnest money is that you could lose the escrow funds if the loan doesn’t close, depending on the conditions in the sales contract. When the closing does occur, the earnest money is credited toward your down payment and closing costs. However, if you simply change your mind and decide the house isn’t for you, the earnest money is forfeited.
You’ll need cash for earnest money, which can run as much as 3 percent of the purchase price. If the housing market is very hot, the earnest money is often a higher percentage. In some cases, earnest money is a fixed amount.
Protecting Your Earnest Money
One of the best ways to protect your earnest money is by obtaining financing before you start house-hunting. No one wants to find out they do not qualify for a mortgage after paying earnest money to a seller, or that the amount for which they qualify is much less than they thought.
Make sure the real estate contract contains a contingency clause stating that are you are able to obtain financing. With such a clause, failure to get a mortgage means at least you should receive a refund of your earnest money. Without this clause, the seller probably can keep the funds.
Additional Contingencies
Failure to obtain a mortgage is not the only contingency the homebuyer should have included in the contract to get their earnest money back. All financed homes require an inspection and appraisal. Properties that may appear in good condition to the layperson may turn out to have serious deficiencies once a professional inspection takes place. While you might renegotiate the sale price with the homeowner if repairs are costly, you may also decide the extra expense is not worth it. A contingency clause regarding such issues should allow you to get your earnest money returned.
A lower than the agreed-upon selling price in an appraisal is a different story. Lenders are not going to finance a property for more than it is worth. Since a low appraisal is going to prove an ongoing problem for the seller, most will lower the price for the buyer. If the seller won’t budge, a contingency clause regarding appraisal price should permit the refund of your earnest money.
Contact Us
If you’re looking to buy or sell a home or find a rental property, you need a knowledgeable, experienced realtor familiar with all aspects of the Hawaiian real estate market. Contact Island Realty Group LLC at 808-689-7407 or IslandRealtyGroup@irghi.com.
