What is Earnest Money?
Earnest Money is the deposit – the check – that accompanies the offer documents when buying a home.
Why is this necessary? You see, when buying a home, one of the documents that you are required to execute is an actual contract – a Residential Sales Contract – and for a contract to be valid, it must contain three (3) key elements.
(1) There must be an offer by the offeror – that is you, the buyer.
(2) There must be acceptance of your offer by the offeree – that is the seller
(3) There must be consideration (something of value) – given by you, the buyer, to the seller in exchange for the seller’s promise to act, i.e. to turn over the deed to the house to you.
How much this earnest money should be will differ in each situation and market. In the Arlington VA market, the high end of 1%-3% is the norm and if you are in a seller’s market, be prepared to go way over that amount.
It goes without saying that a large earnest money deposit is going to signal to the seller a seriousness of intent to purchase by you, the buyer, in addition to a strong financial position.
It is always advisable to make your earnest money deposit check payable to your Title & Escrow company as opposed to the seller.
Can I lose my Earnest Money?
Yes. However, it is not an everyday occurrence. Most contracts are consummated without incident and even most of those that do ‘fall out’ never involve the loss of earnest money.
If you are working with a realtor and properly completed documents and you abide by them, there is nothing to fear.
So make sure you are dealing with a realtor who will be utilizing the contract documents provided by his or her realtor association. These documents have been carefully put together to protect both sides of a transaction. And, please be aware that you can work with your attorney through the process as well.
What is the difference between pre-qualified and pre-approved?
Most home buyers utilize their banks or other financial institution to get a loan (mortgage) with which to make the purchase. Before the bank or financial institution will grant the loan, they carry out in-depth search and checks into the potential borrower’s situation – financial and otherwise.
A full-fledged approval will require completion of a detailed application – disclosure of assets, liabilities, work history, income history, employment history, credit record, rental history to name a few, all with corroborative documents.
Successful passing of this detailed process (underwriting) allows the bank or financial institution to issue a letter – a pre-approval – stating that all things being equal at the time of closing, they will grant a loan for a certain sum and rate of interest. This letter will be conditional on certain things/events taking place, e.g. an appraisal.
This pre-approval letter allows the potential buyer to shop with confidence in the same vein as someone with cash.
It also strengthens the buyer’s offer, since it will tell the seller that there is no fear that the contract could fall out due to financing.
In many instances, pre-qualified letters are given to prospective buyers. In this case, only a cursory check of the buyer’s situation is made – credit check, pay stubs. This involves no underwriting and is just an opinion by a Loan Officer that a buyer would qualify for a certain amount. Indeed, there are some institutions where these pre-qualification letters are sent out automatically.
These letters carry no weight and there is no assurance that the buyer will eventually be successfully underwritten for a loan.
In reality, the only purpose served by a pre-qualification letter is to give an idea of the price range that a buyer should be looking at.
Bottom line, if you are seriously in the market to purchase a home, go through the pre-approval process prior to the start of your home search and get armed with a conditional approval letter from the lender. You’ll be glad you did.
Should I speak with a bank/lending institution before looking at homes?
My answer is a definite yes, although in the excitement of thinking about purchasing a home, many people will immediately start searching online and/or attending open houses.
If you are serious about purchasing a home, consult with an experienced realtor who will be happy to go through the no-hassle home buying process with you where the first order of business will be for you to speak with a lender.
Why? First and foremost, unless you are a cash buyer, you want to know what kind of financing you will qualify for. The lender will go into that with you. In doing so, the lender will discover if there are any issues with your credit which you might not be aware of, giving you time to get it taken care of.
Sometimes it is not a credit issue per se, but rather a requirement for a loan. For example, a purchaser might not know that because his/her income is commissioned, i.e. not salaried, that a FULL 2-year history is necessary. It does not matter how much it is, or how much down payment you might have. You must demonstrate a 2-year history of commission income by way of bank statements and income tax returns.
It is disappointing to say the least, but even more so if you had spent time looking at homes and was ready to make an offer. You want to know this upfront.
By consulting with a lending institution first, you will also know the price range of the homes that you should be looking at. This alone is a great time saver.
Thirdly, you are going to be in a very strong position when it is time to make an offer. A seller is going to look much more favorably on an offer accompanied by a pre-approval letter (as if you had cash really. It reduces the seller’s anxiety about the offer being pulled because financing could not been obtained.
In addition, especially when there are multiple offers, you have to act fast. Waiting until you find the house and then starting the approval process no doubt will cost you the house.
What is an appraisal?
An appraisal is a professional, independent, objective inspection of a home with the intent of arriving at its value? It is done by an appraiser who is licensed as such after going through rigorous training and examinations along with other requirements under the auspices of the state regulatory body.
It involves the inspection of both the interior and exterior of the home and comparing it (subject property) to other similar homes in the neighborhood sold within the last six months within a mile of the subject property.
Prior to the mortgage meltdown a few years ago, the appraisals were ordered by the buyers. With the advent of the numerous regulatory changes and the passage of the Dodd-Frank Act, only the lending institutions can now order appraisals from a specific pool of appraisers.
The lender needs to know that the value of the property is sufficient to cover the loan amount that is being considered.