What Is Earnest Money On A Home Purchase Transaction?

This BLOG On What Is Earnest Money Was Written By Gustan Cho Of CrossCountry Mortgage 

Earnest Money is a deposit a home buyer submits with the real estate purchase offer. This deposit gives the home seller the assurance that the home buyer is serious about the purchase of the home.

Here is how the deposit of a home purchase transaction works:

  • Home buyers who are interested in making an offer on a particular home normally writes an earnest money check and submits it with the real estate purchase contract to the seller. 
  • There is no minimum amount of deposit a home buyer needs to submit. 
  • Sometimes a buyer writes an earnest money check for $500 while other times check can be $10,000. 
  • Earnest Money is refundable during the home buying process contingency period.
  • The higher the deposit, the more likely it is that the seller will accept the offer. 
  • Large earnest money shows strength and the seriousness of the purchase offer. 
  • Earnest money is used towards the down payment of the home purchase and gets applied from the cash to close the borrower needs to bring at closing
  • The earnest money is deducted from the down payment required by the mortgage lender.

Contingencies On Purchase Contract

When a home buyer enters into a real estate purchase contract, the earnest money shows that the home buyer is serious about the home purchase.  When a home buyer enters into a real estate purchase contract, there will be many contingencies. Contingencies listed on a real estate purchase contract is a clause that allows the buyers of the home to back out of the deal and get a full refund on their earnest money deposit. Here are examples of contingencies on a real estate purchase transaction:

  • Home inspection
  • Mortgage contingency
  • Appraisal contingency
  • Closing terms contingency
  • Other contingencies will be listed on the real estate purchase contract
  • For each of these contingencies, there is a time period
  • A home buyer has a certain amount of time to do their due diligence on the subject home and can cancel the real estate purchase contract during this time period with no questions asked
  • The earnest money is held in an escrow account of a realtor, attorney, or title company
  • For example, if a home buyer enters into a real estate purchase contract and has a ten day home inspection contingency, the home buyer has ten days of getting the subject property inspected
  • If the home inspector finds many defaults with the subject property and the home buyer decides to cancel the real estate transaction, they may do so and the full earnest money needs to be returned by law or both the buyers and sellers can go back to the drawing table and renegotiate the purchase contract
  • The seller will give a certain amount of time to the home buyer to cancel the home purchase and after a certain date, the earnest money can become non-refundable
  • For example, there is a mortgage contingency date on a real estate purchase contract for mortgage loan commitment, appraisal, home inspection, and closing
  • If the mortgage contingency date passes and the home buyer does not ask for an extension, then the earnest money can become non-refundable

Issues With Earnest Money During Mortgage Process

All assets in the mortgage approval process needs to be verified. Undocumented funds cannot be used as sourced qualified funds and be applied for cash to close. Here are important information on sourced funds:

  • Mortgage lenders will require 60 days of bank statements and all deposits need to be verified
  • For example, if you have an irregular deposit for $5,000 and that $5,000 was a cash deposit, that $5,000 cannot be used towards your down payment and/or closing cost verification
  • However, if you got that $5,000 deposit from a sale of a vehicle, then a copy of the check and bill of sale will be required and you can use that $5,000 towards your asset verification
  • If you get gift funds from a family member, then a gift letter from the donor will be required as well as 30 days bank statements from the donor and the funds leaving the donor’s account into the recipient’s account
  • When home buyers give the sellers an earnest money, they should always give the earnest money via check
  • Mortgage lenders will want to see the copy of the cancelled check and make sure that the funds came from the mortgage loan borrower’s account
  • The funds in the mortgage loan borrower’s bank account needs to be seasoned for at least 60 days
  • There are many cases where home buyers give cash for their earnest money
  • Unfortunately, this will create senseless paperwork and the cash earnest money cannot be used towards the down payment on the home purchase

Gustan Cho NMLS 873293

Area Manager Of The Gustan Cho Team at CrossCountry Mortgage NMLS 873293

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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