This is an early question that comes up during the initial home buyer consultation. The out of pocket cost for buyers to make an offer on the house is important particularly with first time home buyers.
Earnest Money is also known as good faith money to show the seller that a buyer is "earnest" in making an offer to purchase their home.
The earnest money is credited to the buyer on the HUD Settlement statement as part of the down payment. It is a check that is written the trust account for the listing broker that remains there until the time of the closing.
The amount of earnest money is dependent on several factors.
1. The listing price of the property. In Iowa, the amount of earnest money recommended is 1% of the purchase price. In cases where the property is less than $150,000, it is not uncommon for the amount of earnest money to be $1000.00.
The exception is new construction. Typically builders will ask for the earnest money to be in the amount of 3% of the base price of the home. It can be paid in installments, as long as all installments have been made prior to the start of construction.
2. The type of financing. When a buyer is paying cash or is planning to make a down payment of 20% or more, sellers expect that the earnest money be a little more than the average. This is especially important if the buyer is making a lower offering price on the property. Conversely, if the home purchase is being made with a VA loan, the earnest money amount can be much less since the buyer pays little or nothing out of pocket and closing costs are included in the financing.
3. The amount of time that the buyer needs in order to close. In Cedar Rapids, a typically escrow period is 45-60 days. In cases where the buyer needs more time, the seller would expect a little more consideration for removing their home from the market for that amount of time.
The earnest money is refundable in most cases. Some common reasons that the earnest money is returned to the buyer would be:
There was a major defect that is found upon inspection that cannot be resolved.
The financing for the buyer is not longer available due to unforeseen circumstances.
The seller is unable to provide a clear title on the property.
The appraisal is not equal to or higher than the purchase price and the seller refuses to lower their price for the buyer to obtain the loan.
In rare cases, the earnest money will be retained by the seller. These cases are less common, but it usually due to the buyer having remorse and no longer wishing to purchase the property. If all contingencies have been released and the buyer has no cause, the seller may choose to keep the earnest money or to return it to the buyer.
The earnest money cannot be released from the trust account until a form is signed by all of the involved parties. They need to be in agreement as to whom will receive the earnest money.
When you get ready to search for a home, ask about the amount of money that will be required to make an acceptable offer on the property of your choice. Your agent can give you advice on how to best present your offer in terms and price. Call me for your free initial home buyer consultation and we will discuss all of your options!