The earnest money deposit is an important part of the home buying process. One that seems to create some confusion, especially for a first time homebuyer.
When buying a home, be prepared to write a few checks up front prior to of closing.
The first check that is typically written is the earnest money deposit. The deposit demonstrates to the seller you are a serious buyer and are committed to moving forward with the transaction. Sellers seldom accept offers without earnest money. Once your offer is accepted, the seller is essentially taking his home off the market. And you are protected from the home being sold to another individual.
The amount you put down as earnest money will depend on the area and market conditions. On average, earnest money deposits range from 1% to 2%. With the current sellers market, a higher earnest money deposit may help you win a bidding war.
The earnest money deposit is held by the title company in its escrow account.
Although the earnest money deposit is for the seller it is made payable to the title company handling your transaction. So, once your offer is accepted and the Residential Contract executed, you will be expected to give your earnest money to the title company. You can make this payment by cashier’s check, personal check, or wire transfer.
The earnest money deposit is acknowledged in the contract by the title company. This is on page 9 of the Residential Contract (state of Texas). Your earnest money will be held by the title company until your closing day.
You will need to document your earnest money funds during your mortgage loan process. Be prepared to provide proof of where the funds came from as well as a copy of the cancelled check.
Your earnest money will show on your closing settlement statement as a credit. It will be applied towards your down payment, thereby reducing the amount of funds you need on closing day. If it happens to exceed your required down payment, then it would be applied to your closing costs.
Note: Sometimes you may hear your transaction referred to as “the close of escrow”. Don’t confuse this use of the word “escrow”. The word escrow is also used when referencing your impound account. An impound account is for your taxes and insurance.