As a home buyer, you write an offer using a home purchase contract. This contract contains provisions about how you’re going to increase your commitment level as you move through the buying process.
This commitment starts with an earnest money deposit. Named Earnest Money Deposit because it’s a deposit made in earnest and good faith of your intent.
Earnest money deposits are usually 1 percent to 3 percent of a home’s purchase price. This also depends on local custom, and the pace of current market conditions. (the faster the market pace, the higher the deposit). So if you were buying a $300,000 home, the deposit would be $3,000 to $9,000.
These deposits are typically due within three days of the buyer and seller agreeing to a purchase contract in writing. They can be paid all at once, or broken into two different phases as follows:
Phase 1 will typically be between $1,000 and $5,000, regardless of home price.
Phase 2 will be the balance due after phase 1. So on a $300,000 purchase price with a required deposit of 3 percent, if you paid $1,000 in phase 1, the remaining amount due for phase 2 would be $8,000.
Whether deposits are delivered all at once or broken into two phases, they typically must be delivered via cashier’s check or wire. Personal checks are rarely accepted.
Deposits aren’t held by the seller. They are held by the escrow company or attorney handling the settlement for transaction. Your real estate agent can advise whether you’re in a state that settles home purchases using escrow companies or attorneys.
Your loan approval process is running simultaneously as you’re paying your deposit(s), and because your lender will require that you document all real-time activity of all your bank accounts, they will require you to document payment of your deposit(s).
Your lender will require you to show copies of the wire transfer or cashier’s check to reconcile with your bank account statements and/or online transaction summaries, and they will also require the escrow company or attorney to show proof of those funds going into their account, as well as an earnest money deposit receipt.
Your purchase contract spells out when deposits are refundable and when they become nonrefundable.
Often your deposit is tied to other provisions of your contract, so your deposit is refundable during your protection (or contingency) periods, but after you release certain contingencies, the deposit becomes harder to recover.
Using the two-phase deposit example above to illustrate, you will often have to release contingencies as you pay phase 2.
For example, your contract might say you have to release your financing contingency as you pay phase 2 of your deposit. A financing contingency protects you for a specified number of days while you’re obtaining your loan approval.
If your loan isn’t approved within that time frame, you can break the contract before increasing your deposit and get back whatever deposit you already made. But if your loan is approved, you’d need to increase your deposit as you’re releasing your financing contingency. Then if you tried to break your contract later because something went wrong with your loan, you’d have a harder time recovering your deposit.
Because you’re writing up your contract as you write home purchase offers, consult your real estate agent about writing the contract to provide you with the greatest possible protection for your deposit.
You real estate agent will also advise on how far you can push to protect yourself in the contract when writing offers. It will depend on buyer demand in the market at the time, and on the seller’s overall motivation.
Deposits aren’t considered as important to sellers as other terms like down payment size and closing speed. An earnest money deposit below local norms can cause questions about your level of commitment and/or strength as a buyer. So as long as you have other contingencies to protect you while you’re securing your loan and having the property inspected, you can stick with local norms on your deposit level.
Listen to your real estate agent’s advice, but follow your own instincts on deciding a fair price. Calculating your offer should involve several factors: what homes sell for in the area, the home’s condition, how long it’s been on the market, financing terms, and the seller’s situation. By the time you’re ready to make an offer, you should have a good idea of what the home is worth and what you can afford. And, be prepared for give-and-take negotiation, which is very common when buying a home. The buyer and seller may often go back and forth until they can agree on a price.
Your real estate agent will assist you in making an offer, which will include the following information:
Remember that a sale commitment depends on negotiating a satisfactory contract with the seller, not just making an offer.
It’s not required, but it’s a good idea. Following the inspection, the home inspector will be able to answer questions about the report and any problem areas. This is also an opportunity to hear an objective opinion on the home you’d like to purchase and it is a good time to ask general, maintenance questions.
An inspector checks the safety of your potential new home. Home Inspectors focus especially on the structure, construction, and mechanical systems of the house and will make you aware of only repairs that are needed.
The Inspector does not evaluate whether or not you’re getting good value for your money. Generally, an inspector checks (and gives prices for repairs on): the electrical system, plumbing and waste disposal, the water heater, insulation and Ventilation, the HVAC system, water source and quality, the potential presence of pests, the foundation, doors, windows, ceilings, walls, floors, and roof. Be sure to hire a home inspector that is qualified and experienced.
It’s a good idea to have an inspection before you sign a written offer since, once the deal is closed, you’ve bought the house “as is.” Or, you may want to include an inspection clause in the offer when negotiating for a home. An inspection clause gives you an “out” on buying the house if serious problems are found or gives you the ability to renegotiate the purchase price if repairs are needed. An inspection clause can also specify that the seller must fix the problem(s) before you purchase the house.
There isn’t a set number of houses you should see before you decide. Visit as many as it takes to find the one you want. On average, homebuyers see 15 houses before choosing one. Just be sure to communicate often with your real estate agent about everything you’re looking for. It will help avoid wasting your time.
In addition to comparing the home to your minimum requirement and wish lists, you may want to consider the following:
Take your time and think carefully about each house you see. Ask your real estate agent to point out the pros and cons of each home from a professional standpoint.
The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include such long-term debts as car or student loan payments, alimony, or child support. The lender also considers cash available for down payment and closing costs, credit history, etc. when determining your maximum loan amount.
The two don’t really compare at all. The one advantage of renting is being generally free of most maintenance responsibilities. But by renting, you lose the chance to build equity, take advantage of tax benefits, and protect yourself against rent increases. Also, you may not be free to decorate without permission and may be at the mercy of the landlord for housing.
Owning a home has many benefits. When you make a mortgage payment, you are building equity. And that’s an investment. Owning a home also qualifies you for tax breaks that assist you in dealing with your new financial responsibilities- like insurance, real estate taxes, and upkeep- which can be substantial. But given the freedom, stability, and security of owning your own home, they are worth it.
You can find out by asking yourself some questions:
If you can answer “yes” to these questions, you are probably ready to buy your own home.