In today’s competitive seller’s market, making your offer stand out is paramount. One way to do that is by putting up earnest money. Also known as a good faith deposit, earnest money is a sum the seller puts down to demonstrate her seriousness as a buyer. Although the concept is fairly simple, it can get pretty complicated in practice. Here, then, is what home buyers in New Jersey need to know about earnest money.
What Is Earnest Money?
As a home buyer in New Jersey, you need to know exactly what earnest money is before laying your money down.
Basically, it’s money put before closing to indicate that a buyer is serious about buying the home and to protect the seller in case the deal falls through. “When a buyer and seller enter into a purchase agreement, the seller takes the home off the market while the transaction moves through the entire process to closing. If the deal falls through, the seller has to relist the home and start all over again, which could result in a big financial hit.
“Earnest money protects the seller if the buyer backs out. It’s typically around 1-3% of the sale price and is held in an escrow account until the deal is complete. The exact amount depends on what’s customary in your market. If all goes smoothly, the earnest money is applied to the buyer’s down payment or closing costs.”
Earnest money also benefits sellers by decreasing the likelihood of a buyer’s “placing offers for multiple homes [and] then walking away after the seller takes the home off the market. To discover more about how earnest money works in the [market_cxity] market, you can contact a local agent at 855-966-DEAL.
How Much Earnest Money?
So then the question is: How much earnest money should you put down? The exact answer, of course, depends on the local market (especially if bidding wars and cash offers are common) and the condition of the property, but we can offer some general guidelines.
“In most real estate markets, the average good faith deposit is between 1% and 3% of the property’s purchase price. It can be as high as 10% for highly competitive homes with multiple interested buyers. Some sellers prefer to set fixed amounts to help filter out buyers that aren’t serious.
“The best way to determine a reasonable earnest money amount is to talk to an experienced real estate agent. They’ll assess the property and market-specific factors and quote a figure within the standard range. While losing your good faith deposit is unlikely, offer an amount that the seller will appreciate without exposing yourself to financial risk.”
In most cases, the earnest money is paid to an escrow account or some other third party that holds the funds. The money remains in this account until closing. At closing, the money is typically applied to the buyer’s down payment and/or closing costs.
Refunds and Losses
Home buyers in New Jersey don’t always lose their earnest money if the deal falls through. In some cases, buyers get this deposit back, especially when it is covered by contingencies in the purchase contract, for example . . .
- “When a home inspection reveals severe housing defects”
- “If the appraisal amount is lower than the home sale price and the seller will not re-negotiate the sales price”
- “When the homebuyer can’t secure financing”
- “When a buyer is unable to sell their current home before closing on the new one”
The upshot here is that you need to pay close attention to and understand all the contract contingencies.
You can lose your earnest money, though, under these two conditions . . .
- You wave the contingencies. “Financing and inspection contingencies protect your earnest money if your mortgage doesn’t go through or the house is beyond repair. However, if you waive either contingency, you forfeit your good faith deposit if the house does not go to sale.”
- You ignore the contract timelines. “Home purchase contracts often have timelines within which the buyer should complete the purchase process. Failure to close the transaction on the agreed date means you have breached the contract. You may have to forfeit your good faith deposit.”
Protecting Your Earnest Money
You should also take measures to protect your earnest money deposit from fraud and unjustifiable forfeiture. These measures include . . .
- Getting everything in writing. “Make sure your contract clearly defines what amounts to canceling the sale and who ends up with the earnest money. Include any amendments to details like buyer responsibilities and timelines.”
- Using an escrow account for the funds. “To avoid trust issues, never hand your earnest money directly to the real estate seller or broker. Let the manager be a reputable third-party, such as an escrow company, legal firm, title company, or a renowned brokerage firm. Make sure the funds are in an escrow account and obtain a receipt.”
- Fully understanding the contingencies. “Ensure that contingencies that protect your interests are in the contract. Most importantly, you shouldn’t sign a home purchase agreement that doesn’t have the clauses that protect you.”
- Meeting all your buyer responsibilities. “Real estate purchase agreements usually set deadlines to protect sellers. Be sure to respond to all questions and provide requested documents in a timely manner, as well as meet inspection, appraisal, and closing deadlines to avoid breaching the contract.”
And Use an Experienced New Jersey Agent
Buying a home is a huge purchase, and your earnest money deposit can amount to a big chunk of change as well. So you want to make sure you work with an experienced New Jersey agent to protect your earnest money in case something goes wrong. If you’re a home buyer and want to protect your earnest money, contact us today at 855-966-DEAL.