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What exactly is earnest money? Do I need a down payment?

Real Estate Broker/Owner with SoJax Realty

There are many home buyers out there in today's market searching for that perfect home.  After finding THE ONE, most buyers will want to act quickly so as not to loose it to another buyer, this is especially true here in the current Lake Norman housing market.  It seems that homes are selling almost as quickly as they are going on the market.  As a buyer, you will want to be ready and fully understand all of the terms and practices that are common in today's real estate market.


In North Carolina (as with most states) When making an offer to purchase a home buyers will likely make a financial deposit called "Earnest Money".  What exactly is that?  How much should it be for?  What are the risks of making the deposit?  All of these are questions buyers may be asking themselves.  In North Carolina, we actually have 2 deposits payable at the time of offer to purchase.  The other deposit is called Due Diligence and you can learn more about that in another blog post specifically on Due Diligence.  For this article, we will be focusing on the more traditional deposit called Earnest Money.


This video does a fairly good job of explaining Earnest Money in general.  As the video mentions, there are local customs and we at Alford Realty Group can cover that more one on one during the buyer's consultation.




Like the video explains, the earnest money deposit is often considered a sign of how serious the buyer is in making their offer.  Sellers may receive multiple offers at the same time and the earnest money deposit can be a great way for the buyer to show they are more serious than another buyer.  In North Carolina, earnest money deposits are made payable to a 3rd party who will hold the earnest money deposit until closing.  Thus, the seller is not holding the earnest money, nor is the buyer.  The earnest money is counted toward your "down payment".  If you are getting a loan, most lenders will require a down payment of some sort (typically 3.5-20% down is required) and this deposit will count toward that amount.


As mentioned before, in North Carolina, we also have Due Diligence which gives buyers a time period to back out of the contract for any reason or no reason.  If a buyer backs out during the due diligence period, the buyer is entitled to a full refund of their earnest money deposit.  However, should a buyer back out of the contract after their due diligence period has expired, they will forfeit the earnest money deposit.  The seller then gets to keep both the due diligence deposit and the earnest money deposit as restitution for the buyer's breach of contract.  Generally, there are no further remedies available to the seller.  North Carolina instilled this practice as it's general rule to help cut down on the confusion and the lawsuits for breach of contract that come with real estate transactions.  It gives buyers full opportunity to thoroughly check out the home prior to purchase and limits their financial risk as much as possible.  If a buyer puts an offer in on a house and then during inspections finds out the house is in poor condition, the buyer becomes unable to purchase or for any other reason the buyer does not wish to proceed with the transaction, the buyer may back out of the contract with minimal financial risk and receive their earnest money back in full.   


Fortunately, in the vast majority of contracts, the transaction continues past the due diligence date with no issues.  With the transaction continuing to stay on course, both the earnest money and the due diligence deposit are counted toward the purchase price of the home.  Both deposits are shown on the final closing statement and credit is given accordingly.


If you are house hunting in the Lake Norman area (or anywhere in the Charlotte area), contact Lisa Alford with Alford Realty Group today.  Lisa has the knowledge and experience to make your house buying experience a pleasant and smooth one.  


If you are looking for a home in the greater Charlotte area, use our search tool here.




Comments (3)

Jon Zolsky
FunCoast Realty 386-405-4408 - Ponce Inlet, FL
your Daytona Condo Agent

Interesting. Here in Florida we have EMD, but I never heard of due Diligence in any other meaning but the time to do the inspections and final determination.

I will follow the link and read about it

Aug 09, 2015 02:45 AM
Jon Zolsky
FunCoast Realty 386-405-4408 - Ponce Inlet, FL
your Daytona Condo Agent

Went and read about Due Diligence deposit. So, it is a non-refundable deposit. Very strange. The whole point of the Due Diligence period is to make sure everything is right, however, what if it is not right? Seems like no mater what, the money is gone.

Sort of strange to me

Aug 09, 2015 02:49 AM
Ronald DiLalla
Century 21 Discovery DRE 01813824 - Anaheim, CA
No. Orange Cty Real Estate

We only require one deposit here in California   tks for shring with us in Ar Land

Aug 09, 2015 02:57 AM