When you submit your offer to a seller, it usually come in with a check or promissory note. The amount is commonly referred to as “earnest money deposit”. This aims to impress the seller that you are serious and “earnest” about purchasing the property.

Deposit amounts varies in every sales transaction, but usually does not go over 2% of the purchase price. If the property is interesting and is considered “hot”, you may have to offer a larger deposit to as part of your positioning as a buyer. However, underwriting guidelines can be strict and requires you to show proof such as bank statements and the check should be cleared by the bank.   

There is a good reason in keeping the deposit as small as possible, but not to the extent that that the seller would not take you seriously. Take note of the fact that once the buyer and seller enters a binding contract, the earnest money deposit shall be placed in a trust account. At this point, the deposit is no longer the buyer’s money as it jointly-owned with the seller too. When the deal close, the deposit is absorbed as part of the buyer’s down payment and closing costs.     

Forfeit or Refundable?

What happens if the deal is cancelled? Some sellers think that the deposit is non-refundable, whereas some buyers think that they can take their money back. To set the record straight, neither party can use the deposit as penalty for the fault of the other which had led to the break of the deal. What happens first is to compute for the cancellation fees which will be collected from the deposit. Next is that when the money is placed in a trust account, both parties should agree on how to dispose of the funds and deduct for the bank charges or taxes if any.

When both parties decide to cancel in the early part of the deal, the seller normally understands that the remaining deposit is returned accordingly. However, if the break occurs later in the process, both parties should negotiate for a fair solution, considering the time and money that was already put in for the push through of the sale. There is some very rare instances that both parties could not reach an agreement that they need legal mediation to solve the issue.  So, you must realize that keeping the deposit small and keeping things simple will save you and the seller from inconveniences later.

Failure to agree on important issues will hold the earnest money deposit longer than it should -along with it are the inconveniences of canceling the deal. With the help of your real estate agent or mortgage broker, you and the seller can always settle for mutual agreements on anything that is related to the purchase of the home.

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