Can My Earnest Money Go Toward Closing Costs?

There are a lot of terms and expenses to keep runway of when you're buying a home.

You've got your down payment and closing costs, but you may too need an earnest money eolith. Depending where you alive, you may also opt to put down a due diligence fee with your offer.

Due diligence fee vs. earnest coin deposits can be confusing, because both are paid when your offer is accepted and they serve like purposes. Just there are differences, and it's worth knowing how much you might need to put downward once yous become under contract on a home — not to mention what to expect during your due diligence period.

What's in this Article?

Tips to avoid losing your earnest money eolith

What is due diligence?

Due diligence is your and your lender's opportunity to do your "due diligence" to make sure the domicile is in good condition and that you lot tin can afford the loan. Y'all tin can dorsum out of the sale at any time before the end of the due diligence period.

This flow begins after the seller accepts your offer on the firm and you both sign the sale contract. At that bespeak, you lot're "nether contract," and your due diligence catamenia begins.

From the buyer'southward perspective, the due diligence process includes getting an inspection and appraisal to verify that the home is satisfactory and that the sale price matches the value, said Elizabeth Leanza, REALTOR at Realty One Group Music Metropolis in Franklin, Tenn. This process helps the buyer ensure the home'due south livability and safety and to decide whether it's the correct place for them.

The due diligence period is also when your lender volition request a title search. Your lender might also order a property survey and request more financial documents from you during this time.

Larn more than: What Does It Hateful When a Mortgage File "Moves to Underwriting"?

Due diligence fees

The due diligence period is crucial to the homebuying process, considering y'all want to learn everything y'all tin can about the home before y'all go through with the purchase.

From the seller'due south perspective, though, the due diligence period tin can seem risky. In one case they accept your offer, they're legally barred from showing the home to anyone else. If yous get to the cease of a 30-day due diligence menses and determine you don't want to buy information technology later on all, the house goes back on the market.

Only the longer a house is on a marketplace, the less desirable it seems. Then they've at present lost a calendar month in which they might have shown the property to other homebuyers, and the added time on the market could crusade them to get less than they want in the sale.

The due diligence period is crucial to the homebuying process, because you want to acquire everything y'all tin about the home before y'all get through with the purchase.

That'south where a due diligence fee may come up into play, particularly if y'all alive in North Carolina.

The due diligence fee, which is common in that state and possibly others, essentially makes information technology worth the seller's while to accept your offer and risk taking the home off the market place during your due diligence menstruation. This fee is not required; it'due south an optional deposit you can brand to sweeten your offer.

If you purchase the house, the fee gets credited to your cash needed to close. But if you don't purchase the firm, the seller gets to continue the fee as compensation for the fourth dimension and opportunity lost. Due diligence fees are non-refundable if you cancel the sale contract. The seller refunds the coin only if they're the ones who back out of the sale.

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Are due diligence fees mandatory?

Due diligence fees aren't mandatory, and they may non be necessary or allowed in every market, as existent estate laws and norms can vary significantly throughout the country. But if you're looking for a business firm in a urban center or neighborhood where demand is sky high, offering a due diligence fee tin help persuade a seller to accept your offer over the others they may be receiving.

A due diligence fee can also assuage a seller'south fears if y'all want a longer-than-boilerplate due diligence catamenia. Mayhap you're worried about being able to get inspectors over to the house in a timely fashion, or you want to consult with contractors about predictable renovations earlier y'all make a final conclusion. Those are valid concerns, and you should learn everything you can near a home, and get all of your questions answered, before you shut.

If you're looking for a house in a city or neighborhood where demand is sky high, offer a due diligence fee tin can help persuade a seller to accept your offer over the others they may be receiving.

But again, if the answers to your questions cause you to dorsum out of the auction, the seller has lost time and possibly money. So a shorter due diligence flow is in their interest. If you want more time, a due diligence fee can assist purchase that for y'all.

Because the fee is non-refundable, however, think carefully before yous include information technology in your offer. And exist sure to inquire your existent manor agent if due diligence fees are common where you're buying. You don't desire to put coin at hazard if it'southward not necessary to compete.

If you are buying in a place where due diligence fees are common and properties are in demand — an area such equally Northward Carolina'southward Research Triangle, for instance — only offer an corporeality you are prepared to lose. If you commit $five,000 in due diligence money because you think you've found your dream home, only to detect it's riddled with bug, you will lose that $5,000 if you lot cancel the sale.

Other due diligence expenses

In addition to your due diligence fee, if applicable, yous volition need cash bachelor for home inspections.

Your lender volition schedule an appraisal and, as the buyer, you will typically pay the appraisement fee every bit office of your endmost cost. Simply domicile inspections are optional (though you should non skip them), so y'all pay that out of pocket directly to the abode inspection company.

If you have contractors come up to the business firm to give estimates on renovations or repairs you hope to have done on the home, yous'll need to pay any fees they accuse directly besides. Notation that yous cannot order any repairs until you own the home, and some contractors offer gratuitous estimates. Just if they charge for estimates, you're responsible for those costs.

This is your opportunity to brand sure the domicile can accommodate your needs, so try to think well-nigh additions or upgrades you may want to make long-term.

"For example, I desire to make sure I tin can put in whatsoever blazon of fencing I desire, and typically don't desire to brand a contract contingent upon that considering the more contingencies you accept, the less desirable your contract is to a seller," Leanza said. "So we usually squeeze all those things in during the [due diligence period] so if something comes upwards that's unfavorable that may be exterior of the inspection, nosotros have a adventure to terminate."

Whatever money paid out to inspectors, appraisers, surveyors, and contractors is almost always not-refundable.

What is earnest money?

Earnest coin, which you lot can think of as trust money or proficient faith coin, "tells the seller, 'I, in skillful faith as a heir-apparent, am choosing to operate in adept faith. I'm not going to be in alienation of contract. I want to get through the motions properly. And if I am in breach of contract, you get to go on this money,'" said Michael Kelczewski, a real manor professional at Sotheby'due south International Realty. "The college that earnest money, the better, the more appealing it is to the seller because if the buyer does alienation, they keep it."

Earnest coin gets credited to your down payment and endmost costs. Unlike the due diligence fee, earnest money can exist refundable if yous decide to back out of the auction, unless the contract specifically states otherwise due to negotiations.

The hostage money deposit can range from $500 to i% of the habitation'southward sale price, according to Michael Bendebba, a branch manager with Fairway Independent Mortgage Corporation (Fairway owns Home.com).

"Virtually sellers would not entertain a contract where their prospective heir-apparent lacked any skin in the game."

Michael Kelczewski, existent manor professional person

But it serves a similar purpose to the due diligence fee, and it's a highly common part of real estate transactions.

"Hostage coin isn't necessarily required for a contract, although it's very customary and most sellers would not entertain a contract where their prospective heir-apparent lacked any skin in the game," Kelczewski said. "Is it needed or non? Technically, no, simply in practise, yes. I've sold hundreds and hundreds of properties, and I've never had a auction without any hostage money placed in an escrow account for the contract."

When exercise you lot pay the earnest money deposit?

Different your downwards payment and closing costs, which you pay at or right earlier your closing, due diligence fees and earnest money deposits are due one time a seller accepts your offering.

That'due south why you shouldn't offer more earnest or due diligence coin than you accept on-hand in liquid accounts.

The earnest money is held in an escrow account until closing, and the due diligence fee (if y'all're paying one) is paid directly to the seller.

The good news is, both the due diligence fee and earnest money count toward your down payment and closing costs; they're not extra fees on top of those big lump sums.

Is my earnest coin safe?

When you lot submit your earnest coin deposit check, it gets held with an escrow agent, such as the closing attorney, title company, or whoever is overseeing the closing.

The escrow company is a third party that does not specifically represent the buyer or seller. Your money is safe when deposited with escrow.

"This is really of import because there are misconceptions. People remember, 'It's being held, oh, it'due south not going to exist deposited,' when it is deposited," Leanza said.

Know that earnest money is highly regulated past states, said Kelczewski, and is typically required to be in noninterest or interest-bearing escrow accounts. Both due diligence fees and hostage money deposits cannot be mingled with other funds, such every bit your real estate agent's committee, and earnest coin is protected in an business relationship dedicated to your transaction, he added.†

However, depending on negotiations, the seller may be the party to receive the earnest coin upfront when the contract is executed. In that instance, your lender may asking evidence of your earnest money cheque withdrawing from your bank account when the seller deposits it. This is to document your earnest money transaction so you tin receive credit toward your closing costs and pre-paids at closing.

Is earnest money refundable?

Aye. If you decide not to buy the house, you lot can become your earnest money deposit back every bit long every bit you cancel the contract inside your due diligence window. If your due diligence period ends and you lot decide the night earlier closing that you don't want to motion forward, the seller may be entitled to your earnest money.

"If yous simply change your mind and decide not to buy the home, you might lose your earnest money deposit," Bendebba said. "However, if you do your due diligence and do everything that you agreed to under the terms of the sales contract, only due to circumstances beyond your control cannot move forrad, you volition not lose your hostage money deposit."

Depending on your contract, there is a possibility of forfeiting your earnest money deposit if y'all don't close on time. That's why it's essential to submit all of your documents to your lender as soon as possible and then there are no delays in processing your loan.

It's also why yous want to inquire your lender about their average endmost time and how often they close on fourth dimension. A missed endmost could crusade a seller to back out of the sale birthday.

Related Reading: Ask a Lender: What's Your Average Mortgage Endmost Time?

Because due diligence fees and earnest money are "completely discretionary," says Kelczewski, you can put down equally much as you'd like to stay competitive while protecting your interests. He advises clients to put down the lowest amount of earnest money and due diligence fees as possible while taking into business relationship the highest and best offers the sellers are receiving.

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Tips to avoid losing your earnest money eolith

Even though earnest coin and due diligence deposits aren't required by law, a good rule of thumb in today's competitive market is the more financial skin you have in the game, the amend.

"The college that earnest amount, the more than appealing for that seller considering what that means is, 'If I default, I'm willing to requite you this much," Leanza explained. "Y'all want to put downwardly well-nigh i to one and a half percent of the purchase price."

Of grade, you want to avoid losing that coin at all costs.

Here are some ways to protect your eolith

1. Ask your existent estate agent how long a due diligence flow they recommend based on atmospheric condition in your local marketplace and the types of inspections you hope to take done. You lot want the due diligence period to be long enough that you lot can get the answers yous need about the property.
2. Find out your exact due diligence time period and be certain all of your inspections are scheduled well before the concluding day. Give yourself at to the lowest degree a few days to digest all of the data that comes back so you lot tin can brand a confident final conclusion about whether to buy the business firm.
3. Take your real estate agent explicate all contingencies and the process for bankroll out of the sale. You should understand the timeline and exactly when you need to make certain decisions so you don't miss your adventure to get your earnest money back.
4. Respond to your loan officer immediately if they enquire for boosted banking concern statements, tax returns, or other key documents. Your lender needs certain documentation to procedure your loan, and if y'all accept too long getting it to them, y'all could jeopardize your endmost date.

The homebuying process tin can be intense, especially afterward you lot go under contract. But it's important to stay focused and arrive a meridian priority to avoid losing out on the home or on a large sum of money.

"It's a deposit. Yous get it back, if y'all finish on agreed upon contingencies," Leanza said. "You don't get it dorsum if you get cold anxiety and try to cancel the day before closing."

The best affair you can do to avoid losing your earnest coin deposit is to be clear on the terms at the outset.

"Make sure you and your agent review this and understand what is expected of you lot nether the terms of the sales contract," Bendebba said.

Due Diligence Fee vs. Earnest Money FAQs

What is the difference between due diligence fee and hostage money?

Due diligence fee is not refundable if y'all back out of the buy due to a contingency like the home inspection or appraisal. Earnest money is refundable if a 'bargain killer' appears and you wrote that contingency into the contract.

The due diligence period begins when a seller accepts your offer on a home, known every bit going under contract. During that fourth dimension, your lender will schedule an appraisement and procedure your loan application, and yous can schedule inspections.

Although it'due south not required, many buyers include an earnest coin eolith with their offers, which serves as a "expert faith" deposit to testify the seller that you're committed to the purchase. The earnest coin eolith is credited toward your downwards payment and closing costs if you lot buy the home. If you opt out of the sale during the due diligence period, the earnest coin deposit is refundable.

In N Carolina, it's likewise mutual for buyers to offering a due diligence fee, which effectively compensates the seller for the risk of accepting your offer and taking the home off the market during your due diligence menstruum. If you purchase the home, the due diligence fee is typically applied to your downwardly payment and closing costs, merely every bit the earnest money eolith is. But if yous choose non to purchase the home, the seller keeps the due diligence fee.

Can I get my hostage money back during due diligence?

Yep, every bit long as y'all do so before the due diligence period ends and in accordance with the terms of the contract. If you violate the terms, the seller may exist allowed to keep the earnest coin, so brand sure you lot sympathise what you lot're committing to before y'all sign the sales contract.

Can a buyer back out after paying a due diligence fee?

You lot tin choose non to buy a home at any time until you shut and sign the loan documents. However, if you do not cancel the sale contract until after your due diligence period ends, the seller may be entitled to keep your earnest money eolith. If you put down a due diligence fee, the seller keeps that corporeality when you dorsum out of the sale. Due diligence fees are only refundable when the seller cancels the contract.

Should y'all pay a due diligence fee?

When you're a homebuyer considering due diligence fee vs. earnest money it's best to keep in mind that both may be necessary to consummate your home purchase.

Ane is a positive, in-skilful-religion deposit (earnest money) and the other is to provide you with the fourth dimension to complete necessary tasks to ensure the home passes your needs and current regulations (due diligence). If there's annihilation in your contract that'southward unclear, make sure to seek advice from your attorney and real manor agent.

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†Some references sourced within this article accept non been prepared by Fairway and are distributed for educational purposes merely. The data is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.

Source: https://home.com/due-diligence-vs-earnest-money/

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