Do you know about deposits and earnest money when buying a home in Los Angeles? Negotiating the details of any real estate transaction requires time, patience, and a willingness to commit some hard-earned money in order to back up your position in negotiations. To understand exactly how your money works for you when buying your new home, let’s go through what you need to know about deposits and earnest money when buying in Los Angeles:
What Is Earnest Money?
While many people are familiar with the idea of a deposit on a home, not as many are aware of, and ready to commit, earnest money when they put in an offer on a home.
Simply put, it is an amount of money chosen by the buyer that is then put in an escrow account when and if the home seller accepts the buyer’s offer. Part of the reason this is done is to clearly signal to the seller how serious the buyer is about moving forward with the real estate transaction.
In turn, the seller will then change their property’s listing status to pending sale while appraisals and inspections are completed, and contingencies are met. This money stays in the escrow account through the full length of the negotiation and until either the transaction is canceled for one reason or another, or the transaction is fulfilled at closing.
Upon closing, the earnest money is typically applied to either the deposit on the home or the buyer’s closing costs. Some buyers fail to understand that their money is going toward a part of the transaction that benefits them, and believe it’s money given to the seller prior to closing – this is not the case.
What Is the Deposit?
Your deposit is an amount of money that is applied to the sale price of the home at the close of the transaction.
In an average home sale, this means that the deposit is deducted from the total of the buyer’s home loan, or mortgage. While earnest money is payment directed at your dealing with the home seller, the deposit is payment directed at your mortgage lender.
Due to the structured nature of your relationship with your chosen mortgage lender, the details regarding a deposit on a home are much more straight-forward and any possible moving parts are going to be determined through your discussions with your lender.
How Much Money Are We Talking About?
When it comes time to figure out how much money you are wanting to put down as earnest funds, you’ll want to plan for approximately one to three percent of the proposed sale price of the home.
You could certainly decide to provide more or less, but a three-percent earnest payment clearly signals to a home seller that you’re very motivated and serious about moving forward with the transaction. Your home deposit is negotiable with your mortgage lender, but you should aim to put down 20 percent of the total home price in order to avoid Private Mortgage Insurance as an added expense on your monthly mortgage payment.
All-in-all, you should plan to spend a minimum of 21 percent of the total sale price of the home for both earnest money and deposit.
Why Do These Exist?
The easiest way of explaining why both of these payments exist is trust.
You build trust with the home seller by committing money upfront as a show of good faith that you’re taking your offer and the possible future sale of the property seriously. The deposit is done partially to show your mortgage lender that you’re serious and to build trust, but it’s also a way of avoiding Private Mortgage Insurance. PMI is an additional payment required on any conventional mortgages until they have paid off a minimum of 20 percent of the agreed-upon sale price of the property.