There are other costs associated with buying a home beside the down payment. Some of those include fees for the appraisal, home inspection, and title work. Today, we want to focus on costs called "earnest money deposit" and "good faith deposit."
We'll share what those terms mean and the conditions under which they may be refundable.
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Earnest money is a kind of security deposit given to the seller after they accept the purchasing agreement, and it provides a sort of "proof" that you're serious about buying the home.
It also gives you time to secure your financing if you haven't done so already. Any sum that you deposit as earnest money will go towards your closing costs.
The amount you give can be a fixed amount or a percentage of the selling price. Your real estate professional will let you know what to expect as it varies depending on the area.
Never give it directly to the seller. You always want to give it to a third party, such as the title company, to put it in an escrow account for you. And remember to ask for a receipt!
It's only under specific circumstances that an earnest money deposit is refundable. Here are some of the most common ways potential homebuyers get a refund of their earnest money.
At closing, your earnest money will be applied as a credit toward your closing costs. However, if you don't get your home funding, you can potentially lose your deposit. To increase the likelihood of getting a refund, add contingencies to your purchase agreement, such as:
Home inspection contingency: Clarify in the purchase agreement that a refund is due if certain problems are revealed in the home inspection.
Appraisal contingency: Stipulate that you can get your deposit back if the home doesn't appraise at the purchase price. If this were to happen, the seller might want to renegotiate to make the transaction go through, but that's not always the case.
Financing contingency: With this contingency, you can get your deposit back if you fail to get a mortgage. This, in a way, defeats the purpose of convincing the seller that you are willing and able to buy the property. However, this contingency helps to protect your deposit.
Existing home sale contingency: You can negotiate that the purchase of this new property is dependant on the sale of your current property. There's typically a deadline by which you have to sell your home for this to remain in effect.
Purchase agreements are negotiations, and the seller won't agree to every contingency. However, the bottom line is that you should know the terms of your purchase agreement, including when you can and can't get your earnest money refunded.
Like an earnest money deposit, a "good faith deposit" is used to underline your intent to buy the property. However, while an earnest money deposit is indirectly given to the seller, a good faith deposit is paid directly to the lender.
Like earnest money, if you close on the mortgage, the good faith deposit will go towards closing costs like appraisals, credit checks, underwriting, and other loan processing fees.
Sometimes, the term "good faith deposit" is used synonymously with "earnest money deposit." If that's the case, how much you pay is the same as mentioned above in the earnest money section.
However, when referring to a good faith deposit given to a lender, the amount will vary based on their policies. The lender will let you know the amount, list the fees that your deposit covers, and the terms under which the deposit may be refunded. Generally speaking, good faith deposits are nonrefundable.