Does Earnest Cash Go to Your Down Cost? Discover Out Right here

If you happen to’re within the course of of shopping for a house, you’ve in all probability heard about earnest cash and down funds. These are two key monetary commitments patrons make in the course of the homebuying course of, however they serve completely different functions. So, does earnest cash go towards your down cost? Normally, sure, however let’s break it down on this Redfin article so you understand precisely the way it works.

Key takeaways:

Earnest cash is a good-faith deposit that reveals the vendor you’re dedicated.
Earnest cash just isn’t the identical as a down cost, however it’s often utilized towards your down cost at closing.

What’s earnest cash?

Earnest cash is a deposit you make after your provide is accepted to display to the vendor that you simply’re critical about buying their residence. Consider it as a great religion deposit – it reassures the vendor that you simply’re dedicated to following by way of with the transaction. 

Whereas not legally required, earnest cash has develop into a regular observe in actual property transactions. Whether or not you’re shopping for a house in Denver or a house in Atlanta, you’ll doubtless have to put down earnest cash as an indication of your dedication earlier than making a down cost.

How earnest cash works

Earnest cash is usually 1-3% of the house’s buy value: You submit it after the vendor accepts your provide. Normally, it’s paid inside 3 days of signing the acquisition settlement.
It’s held in an escrow account: A impartial third get together (escrow firm or title firm) holds the funds till closing.
It’s credited again to the client at closing: If the deal strikes ahead, your earnest cash is utilized towards your down cost or closing prices.

Nonetheless, when you again out of the deal for causes not coated by contingencies (similar to inspection or financing), you might forfeit the earnest cash to the vendor.

Does earnest cash go in the direction of the down cost?

Sure, earnest cash is usually utilized to your down cost at closing. Nonetheless, since earnest cash is often solely 1-3% of the acquisition value, it doubtless received’t cowl your total down cost, so that you’ll have to convey the remaining quantity while you shut.

At closing, the escrow or title firm transfers the earnest cash to the suitable get together. If you happen to’re financing the acquisition, the cash is usually despatched to your lender, who applies it towards your down cost.

Right here’s an instance: Let’s say you’re shopping for a $300,000 residence and placing 10% down ($30,000). If you happen to already deposited $6,000 in earnest cash, you’ll solely have to convey an extra $24,000 to closing for the remaining stability of the down cost. Remember that this doesn’t account for added closing prices you’ll have to pay for.

Can earnest cash go in the direction of closing prices?

Sure, in some instances, earnest cash could be utilized to closing prices as a substitute of the down cost. This often occurs in one of many following situations:

Your earnest cash exceeds your down cost

In case your required down cost is lower than the earnest cash you deposited, the additional funds will go towards closing prices.

Instance: Your down cost is $8,000, however you place $10,000 in earnest cash. The remaining $2,000 will assist cowl bills like mortgage origination charges, title insurance coverage, and escrow prices.

You’re utilizing a no-down-payment mortgage

If you happen to’re financing with a VA mortgage or USDA mortgage, which don’t require a down cost, your total earnest cash deposit can go towards closing prices as a substitute.

Instance: You’re shopping for a house with a VA mortgage, and your earnest cash deposit was $5,000. Since there’s no down cost required, the total $5,000 will assist cowl closing prices, decreasing what you owe at closing.

What occurs to earnest cash if the deal falls by way of?

You’re doubtless questioning what occurs – and who retains – earnest cash if the transaction falls aside. The reply is dependent upon why the deal fell by way of and who backed out.

Purchaser cancels and not using a legitimate motive

If the client merely adjustments their thoughts or doesn’t meet their contractual obligations and not using a legitimate motive, the vendor sometimes retains the earnest cash. This serves as compensation for the effort and time the vendor spent on the transaction and the inconvenience of eradicating the property from the market.

Purchaser cancels for a legitimate motive (contingencies)

If the client cancels because of a legitimate motive, similar to a failed residence inspection, incapability to safe financing, or a low appraisal, the client is often entitled to a full refund of their earnest cash. These causes are sometimes spelled out as contingencies within the contract, giving the client a method out with out shedding their deposit.

Vendor cancels or breaches the contract

If the vendor backs out or breaches the phrases of the settlement, the client is mostly entitled to a full refund of the earnest cash. In some instances, the client may additionally be capable to pursue additional damages, relying on the state of affairs.

Disagreements over earnest cash

If there’s a dispute between the client and vendor over who will get the earnest cash, it could stay in escrow till the problem is resolved. If each events can’t agree, the funds might have to be dealt with by way of authorized channels.

Easy methods to defend your earnest cash

To keep away from shedding your earnest cash if the deal falls aside, think about the next: 

1. Embrace clear contingencies within the contract: Be sure that your contract contains contingencies that defend you if one thing goes improper. Frequent contingencies embody residence inspection, financing, and appraisal contingencies.

2. Take note of deadlines: Actual property contracts include strict deadlines. If you happen to miss key deadlines (like for inspections or mortgage approval), you danger shedding your earnest cash. Be diligent about assembly all of the required timelines.

3. Maintain documentation of all communications: At all times hold information of your communications with the vendor or the vendor’s agent. If a dispute over earnest cash arises, having a transparent paper path will help defend your pursuits.

4. Use an escrow account: Guarantee your earnest cash is held in an escrow account, managed by a impartial third get together. This protects each you and the vendor, and ensures that the funds aren’t launched till all circumstances are met. If there’s a dispute, the cash stays in escrow till it’s resolved.