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Lindsey Peterson avatar

by Lindsey Peterson / Jul 01, 2019

Earnest Money and Due Diligence

Each of these terms are important parts of a purchase contract when buying a home. Most borrowers don’t know the conditions of each, will you get the money back, and how much money will be required for each.  

Earnest Money

Earnest money is often defined as “good faith money” or a “deposit” for the home buyers to show the sellers they are committed to purchasing the home. This money is typically about 1-2% of the purchase price and is put down within 5 days of an offer being accepted. After this happens, an escrow agent puts the money into an account where it will stay until the home buying process has been completed. During this time, no one can touch that money, including the escrow agent.

Do you get it back at closing?

Most of the time, no. But that is a good thing! If everything goes smoothly with the appraisal, home inspection, etc. and you are the owner of a new home, the earnest money will come out of the escrow account and go towards things such as closing cost or the down payment.

If you happen to be doing a VA or USDA loan and have no down payment involved in the transaction, the earnest money will be applied only to the closing costs. If there is any money left over after closing costs will be paid, you will get whatever is leftover back.

Due Diligence

Due diligence money gives the home buyer the time to dig deeper into the Offer to Purchase contract before committing to buying. This money ensures that for a certain time, the buyer has the opportunity to do explore things such as home/pest inspections, appraisal, repair negotiation, and loan qualification before buying. Basically, this gives them time to explore any reason why they may want to terminate the contract.  

The difference between earnest money and due diligence is that due diligence money is 100% non-refundable, and earnest money in some cases, is. The good news though is that if the buyer decides to move forward with purchasing the home, the due diligence money can be applied towards closing costs.

 

How much will I pay for Due Diligence and/or Earnest Money?

There is no defined amount for either. As mentioned before, earnest money is usually 1-2% of the purchase price and due diligence is usually anywhere from $500-2,000. 

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