Earnest Money Deposits
After you have come up with an offer
price, the next step is to determine how large a deposit you want to make with
your offer. You want the "earnest money deposit" to be large enough to
show the seller you are serious, but not so large you are placing significant
funds at risk.
One recommendation is to make sure your
deposit is less than two percent of your offered price. The reason for this is
that if your deposit is larger than that, the lender will pay particular
attention to how you came up with the funds. You might have to provide a copy of
a canceled check along with a bank statement showing you had the money to begin
with. Normally, this is not a problem, but if you have a short escrow period or
are barely coming up with your down payment, it could pose an inconvenience.
Another reason to limit your deposit is
"just in case." Although significant problems are the exception and not the
rule, they do occur. "Just in case" there is a nasty or prolonged dispute
between you and the seller, the less money you have tied up in a deposit, the
fewer funds you have placed at risk.
As with practically everything in real
estate, there are exceptions to this rule, too. During a hot market there may be
multiple offers on the property that interests you. A large deposit may impress
a seller enough so they will accept your offer instead of someone else’s, even
when your unknown competitor is offering the same price or slightly higher.
Since large deposits do impress sellers, you
may also find that by making a large deposit you can convince the seller to
accept a lower offer. More money up front may save you money later.
Mortgage Glossary6
