What to Know About Earnest Money in Colorado

Published:
August 18, 2022
Last updated:
August 15, 2022
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Excited about buying a home in Colorado? Trying to figure out how much earnest money you need to come up with? The amount of your earnest money deposit depends largely on the competition for the home, how serious you are about buying the home, and how certain you can be that the home purchase will go through.

Buying a home is an exciting adventure. You want to get the home of your choice off the market as soon as possible to avoid other offers coming in and messing up your home buying plans. Putting down earnest money gets the home unlisted while you negotiate terms with the seller.

Your earnest money is separate from your down payment, but can be applied to closing costs.  Make sure that your home buying contract is crystal clear about what happens to the earnest money if the sale falls through.

Putting Earnest Money in Escrow

Making an offer on a home generally requires that you put up some money known as earnest money upon offer acceptance. This money is deposited into an escrow account, which means neither you nor the seller can access it without specific contract requirements being met.

These requirements are usually listed in the contract as “contingencies.” They help safeguard your money in case the home purchase falls through and it’s not your fault or choice..

The escrowed funds also protect the seller in case you walk away for no good reason. Since the seller has to take their home off the market after accepting your offer, that means they aren’t getting any other offers, and the expense of relisting and paying their existing mortgage can be steep if they have to start over.

When a Home Purchase Falls Through

Not all home sales are meant to be. There are plenty of good reasons a home sale can fall through. You’re simply putting down earnest money to show good faith that you intend to buy the home, as long as it is as advertised. Who gets the money if the purchase is canceled depends on the reason the sale didn’t complete and the contingencies in the contract.

The buyer gets the earnest money

Most of the scenarios in which the buyer gets to walk away with their earnest money involve contingencies. A contingency is designed to protect you in case something unexpected happens in the middle of the home purchase process.

Some of the most common contingencies include:

  • A home appraisal coming in well under the house’s set sales price (appraisal gap)
  • A home inspection that reveals serious, costly to fix problems with the house
  • Financing that falls through for some reason, leaving the buyer without funding
  • A buyer’s inability to sell a current home before it’s time to close on the new one

As long as the contingency is spelled out in and covered by the contract, and hasn’t been waived, a buyer can back out and the earnest money will be returned to them.

The seller gets the earnest money

If all contingencies in the contract are met, but the buyer ends up not following through on the contract anyway, the seller gets to keep the escrowed earnest money for their troubles.

The most common scenarios for a seller getting forfeited earnest money include:

  • The buyer changes their mind about the home halfway through the sale process
  • The buyer or their partner are in the military and are deployed
  • The buyer experiences a life changing event (divorce, or a death in the family)
  • The buyer encounters an impossible to predict catastrophe (accident or a job loss)

The buyer can still get out of their contract to buy the home, but the seller gets to keep the earnest money to compensate them for the costs and trouble of putting their home back on the market and starting the home sale process over.

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How Much Earnest Money Do Colorado Home Buyers Need?

The amount you’re asked to put down as earnest money can vary. Typically, it’s anywhere between 1% to 5% of the sale price of the home. For example, on a $300,000 house, this could mean anywhere from $3,000 to $15,000.

You can streamline the closing process if you put up around what can be expected for the closing costs, which is usually 2% and 5% of the home’s sale price. However, you might be able to get sellers to cover part of the closing costs, so make sure you discuss this before signing the contract.

If there’s any money left out of the earnest money, it’s refunded to you from the escrow account. You can use it for moving costs or furnishing your new home, or put it back in your bank account.

Five Things Buyers Should Know About Earnest Money

Your Loan Officer will go over the earnest money specifics at the time of your offer as you’re drawing up the home sale contract.

Keep these five things in mind as you consider how much to put down and the process used:

  1. Never give the home seller earnest money directly! Your earnest money should always go into an escrow account, unless it’s held by some other authorized third party, like a real estate attorney.
  2. Remember that if you default on the contract and back out of your offer, the seller gets your cash, so don’t put up more than you can afford to lose.
  3. Make sure your contingencies are clear, so if they aren’t met you can get the escrowed funds back and can walk away without further obligation or costs. Don’t waive contingencies unless you are 99% sure you’re buying the home no matter what.
  4. Ask about what your loan program says regarding earnest money. Some specialized programs have earnest money deposits set as low as $1000 to decrease barriers in the way of home ownership.
  5. You do have a choice about earnest money funds when they are refunded: either take the cash back, apply to closing costs, or (in some cases) make up part of your down payment (although earnest money can’t officially be counted as a down payment in advance.)

Now you know everything you need to about earnest money in Colorado, and can go forth to buy your home with confidence.

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Why Choose Sammamish Mortgage?

At Sammamish Mortgage, we make homebuying easy. Once you’ve secured your desired home and obtained the mortgage you need to make your home purchase happen, we continue to support you throughout your homeownership journey with helpful blogs like this one.

Sammamish Mortgage has been in business since 1992, and has assisted many homebuyers in the Pacific Northwest. If you are looking for mortgage financing in Colorado, we can help you get preapproved. Sammamish Mortgage offers mortgage programs in Colorado, Idaho, Oregon, and Washington.

Contact a loan officer if you have any mortgage-related questions or concerns. If you are ready to move forward, you can view rates, obtain a customized instant rate quote, or apply instantly directly from our website.

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