You found the Hawaii home of your dreams. You can afford it, and you’re pretty sure you can line up financing, no problem. But there are a number of other people bidding on the same home. What can you do to make your offer stick? For many transactions in most of Hawaii, and in other “hot” housing markets, the answer is an earnest money deposit.

This is a sum of money, submitted along with your offer to purchase the home. In face-to-face transactions, you physically attach the check to the offer paperwork with a paper clip. In Hawaii, a typical earnest money deposit could be anywhere between 1 percent and 5 percent of the purchase price, with the higher amounts more common in hotter, pricier markets.

But you can submit any amount you are comfortable with and that suits your budget. Understand that if you have trouble with putting up just 1 or 2 percent of the home purchase price up front, you may cause the seller to wonder whether you will be able to make good on your offer.

In competitive markets, or where the seller must sell quickly for some reason, this could be enough for them to accept another offer from a more solid buyer, even with a lower purchase price.

The earnest money deposit serves three purposes:

  1. It signals to the buyer that you have cash and confidence that you are in a position to see the deal go through to the close.
  2. It ‘locks in’ the deal for you, the buyer. Once the check is deposited into escrow, as long as it remains in escrow and the seller does not refund it to you, the seller can’t sell the property to someone else.
  3. It locks you in to the deal, too: If you don’t fulfill your side of the agreement according to the terms in your purchase contract, you potentially risk forfeiting your earnest money deposit – though this is rare.

Contingencies.
Contingencies are a critical concept to understand when making offers to purchase a home in Hawaii – especially where you are including earnest money with the offer. Most offers are contingent upon a few conditions being met – failure of which entitle you, the buyer, to withdraw your offer and have your earnest money deposit refunded from escrow. For example, your offer may be contingent upon being able to secure financing or the completion of a professional home inspection, including a mold inspection, within a set number of days. You may reserve the right to withdraw or modify your purchase offer based on the results of the inspection: you may require certain repairs be made; that the estimated cost of such repairs be deducted from your closing costs or subtracted from the purchase price; or some combination. As long as you adhere to the contingencies in your contract, you can cancel the deal without giving up your earnest money.

However, if you fail in your contingencies – for example, if you do not have the home inspected within a reasonable amount of time, the seller may be able to refuse to refund the earnest money deposit out of escrow. Again, though, this is unusual. If a seller wants to fight you to keep the earnest money deposit, they’ll have to file a lawsuit and get a court order. This could take months – during which time they can’t sell the house, because there is money associated with the house in escrow. They can’t move on to a new buyer until they release the escrowed earnest money deposit and any other escrowed funds back to you.

That said, there’s no reason to be anxious about the earnest money deposit. Lining up a home inspection within the time allotted is usually no problem provided you start the process right away; and you will need to come up with the entire down payment very shortly anyway, unless you are applying for a 0% down home loan option such as a VA Loan or USDA Loan.

When you put down an earnest money deposit, you should make sure that you are very serious about purchasing the home, and that you’ve already done your due diligence. If you choose to back out for a reason not listed in the contingencies section of your purchase contract, you could potentially forfeit your security deposit. Even if the seller’s attempt to sue to force the escrow company to release the funds to them fails, you’ll still be out the money for as long as that process takes.

As both a mortgage banker and broker, Pacific Home Loans can fund your loan in-house for some of the quickest closings and lowest rates in Hawaii. We offer a large selection of portfolio loans such as condotel, land, construction-to-permanent, self-employed, Alt Doc, along with conventional loan programs to ensure all your Hawaii residential home loan needs are met.

Whether you are purchasing or refinancing a Hawaii Home or a Condominium, Pacific Home Loans is committed to providing you with high-level mortgage planning and guiding you in making informed decisions regarding what is likely to be one of life’s biggest investments. APPLY NOW