Buyer FAQ - What is a Deposit and
How Much Should I Submit with my Offer?
An important decision you need to make when submitting an offer is the amount of the initial deposit, and something you must know about how to buy a house.
While it might not rank up there with the matter of the offering price itself, the deposit is an important component of an effective offer.
Here in Southern California while we commonly refer to the amount submitted with an offer (more on the logistics shortly) as a deposit, you will also hear this referred to as Earnest Money or an Earnest Deposit (EMD), and sometimes a Good Faith Deposit in different areas or other parts of the country. As this implies, the deposit is a show by you of good faith and interest in the property you are offering on.
The deposit is part of your total down payment, not an additional amount as some buyers think. Let’s say you are using a loan for your purchase and are putting down a total of 20% in cash, thus obtaining a loan for 80% of the purchase price. Your deposit, depending on the amount you decide, is part of that 20%.
Once you have an agreed-upon contract with the seller, our California contract stipulates that the deposit is due within 3 business days to the escrow company, unless otherwise negotiated, who will hold those funds until closing.
Commonly those funds are wired since it’s faster and more secure, but some buyers will submit a check. Just be sure those funds are in your bank account and available!
Now for the amount of your deposit.
I’m not going to tell you what that deposit amount should be, but suggest you talk with your Realtor, for a number of reasons. The deposit amount can vary quite a bit depending on the market you are in (e.g., a very strong sellers’ market with bidding wars might suggest a very strong deposit, outside the norm) and common practices in the area, and even the price range.
You certainly want to be competitive and show the seller you are truly interested in the property – a strong deposit will show your good faith and interest, while a low deposit will reflect badly on your overall offer. In our area we commonly see deposits in the range of at least 1% of the purchase price to 3%, or more (and thus with an expensive home the deposit can be pretty substantial.
There is no requirement, of course, but again advice from your agent and your goal of making a strong offer will guide you in determining how much the deposit should be. And in a counter offer situation, especially with multiple offers, some sellers may request a stronger deposit from you, and it will be in your best interest to do so.
Do NOT underestimate the value, and importance, of a strong deposit when making an offer. This is not the time to be cheap.
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