If you’re in the process of buying a house, you’ve probably heard of serious money and drops. These are two important financial commitments that buyers make during the home buying process, but serve a variety of purposes. So, will serious money be directed towards your down payment? In most cases, yes, but let’s break it down in this Redfin article. That way you can know exactly how it works.
Important takeouts:
Serious money is a good deposit that indicates the seller you are committed to. Serious money is not the same as a down payment, but it usually applies to a down payment when closing.
What is serious money?
Earning Money is the deposit you make after your offer is accepted to show sellers that you are serious about purchasing their home. Think of it as a sincere deposit. It reassures the seller that you are committed to continuing the transaction.
Though not legally necessary, serious money has become a standard practice in real estate transactions. Whether you’re buying a house in Denver or an Atlanta home, you’ll need to put serious money as a sign of your commitment before paying your down payment.
Serious money mechanism
Serious money is usually 1-3% of the home’s purchase price. Once the seller has accepted your offer, you submit it. Usually, payment is made within three days of signing the purchase agreement. It is kept in your Escrow account. Neutral third parties (escrow company or title company) hold the funds until closing. I returned to the buyer at the closing time. If the transaction moves forward, your serious money will apply to the down payment or closing costs.
However, if you withdraw your transaction for reasons that are not covered by an unexpected situation (such as inspections or funding), you can seriously forfeit the money to the seller.
Are serious money heading towards a down payment?
Yes, serious money usually applies to down payments when closed. However, since full-scale money is 1-3% of the regular purchase price, it is likely that it will not cover the entire down payment, so you will need to bring in the remaining amount when you close.
Upon closing, the escrow or title company will transfer serious money to the appropriate party. If you are funding a purchase, the money is usually sent to your lender, and the lender applies it to your down payment.
An example is: Let’s say you bought a $300,000 house and cut 10% ($30,000). If you’ve already deposited $6,000 in earnest money, you’ll just add $24,000 to the closure for the remaining balance of your down payment. Please note that this does not take into account the additional closure costs that you will have to pay.
Can serious money go towards closing costs?
Yes, in some cases, you can apply serious money to the closing costs instead of a down payment. This usually occurs in one of the following scenarios:
Your serious money exceeds your down payment
If the down payment required is less than the serious money you deposited, the additional funds will be spent on closing costs.
For example: The down payment is $8,000, but you’ll put in a full-scale $10,000 in money. The remaining $2,000 will help you cover expenses such as loan origination fees, title insurance, and escrow costs.
You are using an unpaid payment loan
If you are funding with a VA or USDA loan that doesn’t require a down payment, the entire serious money deposit could be closure fees instead.
Example: I was buying a house with a VA loan and my serious money deposit was $5,000. With no down payment required, the entire $5,000 will help cover the closing costs, reducing what you’re borrowing when closing.
What happens to serious money if the transaction collapses?
If a transaction falls apart, you’re probably wondering what will happen and who’s keeping serious money. The answer depends on why the deal collapsed and who retreated.
Buyer cancels without a valid reason
If the buyer simply changes his mind or fails to meet his contractual obligations without a valid reason, the seller usually maintains serious money. This serves as the inconvenience of removing property from the market as compensation for the time and effort the seller has spent on the transaction.
Buyer cancels for good reason (contingency)
If a buyer cancels for good reasons such as a failed home inspection, failure to fund or a poor rating, the buyer is usually entitled to a full refund of serious money. These reasons are usually spelled out as contingencies in the contract, and escape without losing the deposit to the buyer.
Seller cancels or breaches the contract
If the seller retreats or violates the terms of the contract, the buyer is generally entitled to a full refund of serious money. In some cases, the buyer may also pursue further damages depending on the situation.
Serious disagreement about money
If there is a dispute between the buyer and seller about who gets serious money, you can stay in escrow until the problem is resolved. If the parties do not agree, the funds may need to be processed through legal channels.
How to protect your serious money
If your transactions fall apart, consider the following to avoid losing your serious money:
1. Include clear contingencies in your contract: make sure that there are contingencies that will protect you in case something goes wrong. Common contingencies include family inspections, funding, and valuation contingencies.
2. Beware of deadlines: Real estate contracts come with tight deadlines. If you miss an important deadline (such as testing or loan approval), you risk losing serious money. Be eager to meet all the timelines you need.
3. Keep all communication documents. Always keep a record of communications with the seller or the seller’s agent. If a serious money dispute arises, having a clear paper path will help protect your interests.
4.Using Escrow Accounts: Make sure that serious money is held in Escrow Accounts managed by neutral third parties. This protects both you and the seller and ensures that your funds are not released until all conditions are met. If there is a dispute, the money will remain in escrow until it is resolved.
