What Happens to the Deposit When Buying a House?

What Happens to the Deposit When Buying a House?

Know that all deposits are negotiable. Many will say that the required deposit is 5% and this is not true. If you are putting 3% down or 0% for a VA loan, then most likely a buyer wouldn’t have 5% to put in deposits. Another example is a home buyer who is selling their house and utilizing the equity in their current home for the next purchase. They may not have the large lump sum available.

Massacbhusetts Home Sellers like to see 5% of the purchase price in deposits, but again this is not a requirement. This is negotiable.

How/When Do the Deposits Work?

Normally there are two deposits throughout the offer process. The number of deposits however is also negotiable. Recently we put a property under agreement where the buyer had three deposits with the third being when his current house sold. We have also put properties under agreement with just the initial deposit. Everyone’s situation is different.

To the Massachusetts Home Seller, the deposit is what ensures that the buyer will perform in the transaction. The deposit is what holds a buyer’s feet to the fire. If they don’t perform or decide to walk away, then they could lose the deposit.

The first deposit is due at the time of the acceptance of the offer. This is called the binder. In order for an offer to be valid there must be some type of consideration to "bind" the agreement. It could be $1, but generally when buying a house in Masscahusetts, we see this initial deposit as a $1,000.

In most transactions, the second deposit comes at the time of the signing of the Purchase and Sale Agreement. This is generally about two weeks after the initial offer has been signed and after a home inspection has been performed with any inspection issues having been negotiated.

In a successful transaction, the deposit provided by the buyer that the escrow agent is holding will go towards a buyer’s down payment. Let’s use a $500,000 purchase price of a home as an example. If a buyer is putting down 10% ($50,000) at closing and does a 5% ($25,000) deposit, then at closing they will need to bring 5% ($25,000) plus closing costs.

Can I Get My Deposit Back?

This is a question we get all the time. And it is a great question. It depends is the actual correct answer. It depends on your specific situation and the offer that you have agreed to.

It’s important to know that while a seller representative who is acting as an escrow agent holds the deposit, they can’t just return or give the deposit however or whenever they feel like it. There are only three ways that the escrow agent is able to disburse funds 1) A successful transaction where buyer purchases the property 2) Both buyer and seller agree on how to disburse funds 3) A judge or mediator directs the escrow agent on how to disburse the funds.

Here are a couple scenarios to consider on how deposits should work. Note I say “should” because you never know the specific situation and what could happen in front of a judge.  

If you have a home inspection continency (as long as all necessary dates are followed) and find home inspection issues that make you feel uncomfortable with moving forward or are unable to come to agreement with the seller on a resolution, then this is an example where you should get your deposit back.

If you have a mortgage contingency (as long as all necessary dates are followed) and are not able to obtain your mortgage, then this is an example where you should get your deposit back.

If you are buying a condo and have a Condo Docs Review Contingency (as long as all necessary dates are followed) and are not satisfied with the condo documents, budget or meeting minutes then this is an example where you should get your deposit back.

If you are buying a house in Massachusetts and get cold feet and just walk away without any cause, then this is an example where you should not get your deposit back. 

Can I Give Cash as A Deposit?

Cash in a brown paper bag if you will is not an acceptable form of a deposit. An escrow agent will not (or I should say SHOULD not) accept the liability of taking cash for a deposit. If a person is looking to finance the property, then this would also create huge issues from the banks perspective as they need to verify all funds.

Click here to learn more about the seasoning of funds for deposits.