Buyers should be educated and informed when making an offer to purchase a home.
Surprises are for birthdays, not buying a home!
Initial Deposit
Be prepared to write a deposit check when making a contract offer to purchase real estate. Commonly referred to as a Binder, this is the check made out to the Selling Real Estate Office when submitting a contract offer. In simple terms, it is a good faith deposit to express interest in purchasing real estate.
What is the required amount of a Binder deposit? There is no law as to a required amount, but local real estate practices may determine what is acceptable. Common sense should prevail in determining the amount of the Binder deposit however. Writing a check for say $100.00 shows good faith, but what kind of statement is that making to the owner when the offer is presented to them? Would a more substantial Binder, say $1,000.00, make a stronger statement? More will follow later in discussing strategies in structuring a contract offer.
The Binder is generally not deposited by the Real Estate Broker until there is offer and acceptance, a signed contract of sale. However, there are State Real Estate Licensing Laws which regulate how long a Real Estate Broker can hold a deposit check without depositing it into the Company’s Trust Account. In cases where contract negotiations are prolonged, perhaps beyond five business days, most Real Estate Brokers will either deposit the check into their Trust Account during the negotiations,or ask the buyer to write a new check as contract negotiations continue.
If the contract offer is not accepted, the Binder is returned to the buyer. If the contract offer is accepted and signed by the owner, the Binder will then be deposited in the Broker’s Trust Account and will be applied to the buyer’s down payment and the purchase price.
Earnest Money Deposit
Commonly referred to as the second deposit, this is the additional upfront deposit made in the purchase of real estate and is also part of the buyer's total down payment. Depending on the real estate market the home is being purchased in, the price range and the total amount of the down payment, the earnest money deposit could be 10% of the purchase price.
More often than not, especially with first time buyers, homes are purchased where the total down payment is less than 10% of the purchase price. In those circumstances, the earnest money deposit will generally be some portion of the total down payment or perhaps the entire amount of the down payment in a transaction where the buyer is using a down total payment of 3% to purchase a home. As with most aspects of purchasing a home, the earnest money deposit is something that may be determined in contract negotiations.
The earnest money deposit is generally paid within a certain time frame after completion of Attorney Review, and is generally paid to the Selling Broker, unless there is a change made during the Attorney Review process where the Seller’s Attorney may request to hold all deposit monies in their Trust Account.
There are times when a contract of sale is terminated after Attorney Review, such as a home inspection revealing problems with the home or mortgage denial. In those situations where a contract to purchase is cancelled in accordance with the terms of the contract, all deposit monies previously paid by the buyer are refunded.
More will follow later in discussing strategies in structuring a contract offer.
Mortgage Considerations
A contract to purchase real estate will include a mortgage contingency clause which provides a time period for the buyer to apply for a mortgage of a specific amount and obtain mortgage approval in order to complete the purchase. The time frame for mortgage approval varies, and is determined by the type of mortgage being obtained (Conventional, FHA, and VA). A buyer’s Real Estate Agent or Mortgage Representative can help in providing more information about this.
It is recommended that a buyer reviews their Mortgage Pre-Approval when submitting a contract offer, and provide a copy to their Agent. Review is necessary to verify that that the mortgage amount in the sales contract offer is the amount in the Mortgage Pre-Approval, or less.
All too often buyers begin their home search in one price range and later find that they need to increase that price range, and increase the mortgage amount, to find a home they like. Obtaining an updated and revised Mortgage Pre-Approval to reflect the mortgage amount in the contract offer is highly recommended.
Mortgage Interest Rates and Mortgage Rate Lock-Ins
Another important consideration is mortgage interest rates. Mortgage interest rates fluctuate from day to day and from one mortgage lender to another. Buyers should obtain a current interest rate quote when making a contract offer as this rate may be different from the interest rate quoted when the Pre-Approval was issued. The interest rate affects mortgage payments, mortgage qualifying and price range.
When submitting a contract offer, a closing date is filled in and is included as part of the contract offer and perhaps contract negotiations. The closing date in the contract can be a consideration as it relates to the mortgage interest rate lock-in. Mortgage lenders have various interest rate lock-in policies. Consult with the Mortgage Representative to obtain more information on interest rate lock-in policies and length of interest rate lock-in period.
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