Earnest Money Deposit
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.
There are also times
when closing can be delayed by weeks, through no fault of your own. Have
back-up plans prepared for such a contingency.