What is an Earnest Money Deposit?

By
Real Estate Broker/Owner with Willner Realty BRE #01913076

What is an Earnest Money Deposit?

 

When you are ready to start your search to buy a home in the Bay Area, the first step is to be pre-approved by a reputable mortgage lender.  Once that is done, you will know the amount of the loan you can obtain and how much of a cash down payment you will have to provide to buy a home.  When you find the perfect home, you will prepare the offer with your Realtor.  One of the first items to decide on after you’ve decided on the purchase price is how much of an earnest money deposit you want to put down.  An earnest money deposit is called an “initial deposit” on the California Residential Purchase Agreement and Joint Escrow Instructions (your offer document also known as the “RPA”) and is also known as a “good faith deposit” and will ultimately go towards your down payment and closing costs when you purchase a home.  This amount must be submitted to the Title company within 3 days of an accepted offer.  The deposit will be taken out of your bank account and held in an escrow account during the transaction.  

 

There are different standards and customs regarding the amount of earnest money you will want to put down.  Currently, in the San Francisco Bay Area, a “strong” offer will typically have an earnest money deposit of about 2-3% for homes that are in high demand.  Although this may not be the deciding factor for the seller when choosing an offer to accept, it could be something they take into serious consideration.  When you are offering a high earnest money deposit, you are showing the seller that you are serious about making an offer and ultimately purchasing their home.  

 

 

Several things will then happen that can affect your earnest money deposit:

 

You decide you don’t want to purchase the home and cancel the contract within the terms of your contract.  You cancel the contract, have the seller sign the respective form and the escrow company mails your deposit to you within several days. 

 

While it’s best to be positive and work hard to make sure you get the perfect home for yourself, sometimes things happen that make you realize that this is not the perfect home for you. 

 

Here are some scenarios:                             

  • You may do inspections and the repairs may be too costly or more than you want to take on and the seller is not willing to do repairs or give you a credit. In this case, as long as you are within the “investigation contingency” period, you can cancel the contract and get your earnest money deposit returned promptly.
  • You may for any reason during the “investigation contingency” period find something in the house or around the home (neighbors, etc) that makes you realize this isn’t the home for you and you can cancel the contract and get your earnest money deposit returned promptly.
  • The appraisal may come in lower than your offer price and you and the seller cannot come to an agreement on how to bridge the gap between the offer price and the appraisal amount.  
  • Something unexpected happens with your loan and you cannot get the loan you are expecting. (this will not happen if you have a reputable mortgage lender and Realtor that make sure you are fully qualified before you make an offer and have coached you on the do’s and don’ts of dealing with your finances while you’re in the process of purchasing a home).

 

As long as you cancel the contract and you are within the terms of your contact, you should have no problem receiving your earnest money deposit back.

 

You have removed all or some of the contingencies in your contract and then decide you want to cancel the contract.  

 

If you decide you want to cancel the contract but have already removed a related contingency, your earnest money deposit is at high risk of not being returned in full or at all.

 

Here are some Scenarios:

  • If you have removed the investigation contingency and then decide you don’t want to purchase the home because of a repair or other reason that has to do with the home, your earnest money deposit may be at risk.  
  • If you have removed the loan contingency and then for some reason you do not get final approval for the loan and you have to cancel the contract because you cannot afford the home, your earnest money deposit may be at risk.  

Ultimately, in the above scenarios under #2, it is up to the seller to decide if they want to return your deposit in full or dispute the refund.  There are important sections in the RPA that you will have reviewed and signed when making the offer that go into detail in regards to what happens if you are in breach of a contract (from examples on #2) and how to resolve those disputes.  These sections are “Remedies for Buyer’s Breach of Contract” and “Dispute Resolution” and if you’re not comfortable or have any information about the contents after you read it, you should discuss the terms with your lawyer.  

 

It’s important to know that the earnest money deposit is not an added cost to the purchase of a home, it will eventually be credited to the down payment and closing costs of your new home.

 

If you are interested in viewing the Calfiornia Residential Purchase Agreement and Joint Escrow Instructions now, contact me by clicking here and I will be glad to send you a copy or go over the document with you in person, by phone or via skype.  It’s important to remember that my specialty is helping my clients purchase or sell Real Estate and while I can help you navigate the ins and outs of the home buying or home selling process, if you have any legal questions, you should consult a lawyer. 

 

There are many decisions to make and steps to take during the process of purchasing a home and having a great Realtor is the first step.  Your Realtor will guide you through the steps of finding a home, negotiate with the Seller’s Realtor and work for your best interests through the entire process.  Maya Willner is a Real Estate Agent in Pinole, CA and serves clients throughout the San Francisco Bay Area.  Email me at AgentMaya@gmail.com with any of your Real Estate related questions.  It is my goal to gain the trust of my clients by achieving their Real Estate goals and becoming their Real Estate Consultant for life.

 

Want to buy a home in the Bay Area?  Search all homes for sale here

 

Thinking of selling your home in the Bay Area? Get a home value report

 

 

Thinking of buying or selling a home somewhere outside of the Bay Area?  Email me for a list of qualified Realtors in your area

 

 

 

 

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Provided Courtesy of:  Maya Willner, Real Estate Broker, Willner Realty

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I aim to be your top Bay Area Real Estate Agent through diligent work, top notch negotiating and constant communication.  It is my goal to create a lifelong relationship with my clients by achieving your real estate goals.

Comments (1)

Frank Rubi
Frank Rubi Real Estate, LLC - Metairie, LA
FrankRubiRealEstate.com

Maya Willner good explanation of earnest money. Buyer need to understand the parts of a real estate contract. 

May 04, 2015 09:30 PM