Earnest Money vs Due Diligence in the Home Buying Process

Buying a home is one of the most exciting experiences of your life. However, it can also be scary, particularly if it’s your first time buying.

To make the process easier, you can rely on a real estate agent to help you find a home that works for you. You can also talk with an attorney to help you avoid costly mistakes during the due diligence process.

To learn more about the home-buying process and the difference between earnest money vs due diligence, keep reading.

What is Earnest Money?

If you are asking, what is earnest money? It is a deposit placed in a real estate transaction between the buyer and seller. The purpose of the earnest money is to demonstrate that the buyer is serious about the purchase. It also serves as a way to protect the seller from the potential of a defaulted sale.

Typically, the amount of earnest money is about 3% to 5% of the sales price of a home, and the money is placed in an escrow account until the sale is completed. The money is typically part of the down payment made at the time of closing on the property.

If the buyer decides not to go through with the sale after entering into a purchase agreement, they will usually forfeit the earnest money. However, this could vary depending on the terms of the agreement.

What is Due Diligence?

Due diligence is a process used to verify and validate certain data or information when completing a transaction or taking on a new responsibility. It includes investigation, inspection, and analysis of a certain detail to get a better understanding of it.

It helps to mitigate risk and uncover any potential issues or problems that may be present. It is important to do due diligence when making decisions in business, investing, or signing a contract. It helps ensure that you have assessed all of the risks associated with the situation at hand. Due diligence is important for any business decision in order to protect the interests of the parties involved.

When Should Earnest Money and Due Diligence be Paid?

Generally, earnest money should be paid as soon as possible when an offer is accepted. This shows the seller that the buyer is serious about buying the property and that they have the funds available to do so.

The earnest money should be around 1% of the purchase price. The due diligence fee should be paid just before the closing. This fee is typically between 1-2% of the purchase price and covers the cost of title insurance, inspections, appraisals, and other services associated with the purchase.

The seller uses this money to fund the costs associated with the closing. This also gives the buyer time to investigate the property and any potential issues before committing to a purchase.

In some cases, the seller may require the full amount of the earnest money and due diligence to be paid at the time of offer acceptance. This requirement should be discussed in the contract and will likely be at the discretion of the seller.

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All About Earnest Money vs Due Diligence

When buying a home, understanding the differences between earnest money vs due diligence is important – it’s the difference between making or breaking a deal.

Buyers should consult a real estate agent, lawyer, or financial advisor to ensure their best interests are protected. Don’t let a confusing process keep you from achieving your dream of homeownership!

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