Friday, November 10, 2023

Under Contract: Knowing your Options

By Tia Morell

In the world of real estate, navigating the complexities of buying a home can be a daunting task. From finding the perfect property to negotiating the price and closing the deal, there are numerous critical decisions to be made. 

Among these, understanding the concept of earnest money, exploring mortgage options, and having a well-prepared real estate agent are paramount. In this article, we will delve into the importance of knowing your options when under contract, the significance of earnest money, and the benefits of exploring different mortgage programs, particularly the differences between 3 percent conventional loans and 3.5 percent FHA loans.

The significance of earnest money

First and foremost, it's crucial to understand what earnest money is and why it's important in a real estate transaction. Earnest money is a sum of money, typically a percentage of the purchase price, that a buyer provides as a show of good faith when making an offer on a property. This deposit demonstrates the buyer's commitment to the deal and reassures the seller that they are serious about the purchase.

Earnest money is held in an escrow account during the course of the transaction and serves as a guarantee of the buyer's intention to proceed with the purchase. If the deal falls through due to the fault of the buyer, the seller may be entitled to retain the earnest money as compensation for time and expenses incurred. However, if the deal collapses for reasons outside the buyer's control, the earnest money is typically returned to them.

Situations where a buyer can receive earnest money back

There are various situations where a buyer can expect to receive their earnest money back.

These include:

1. Contingency Clauses: Most real estate contracts include contingency clauses that allow the buyer to withdraw from the deal and receive their earnest money back if certain conditions are not met. For example, if a home inspection reveals significant issues or the buyer cannot secure financing as specified in the contract, they are entitled to a refund of their earnest money.

2. Seller Defaults: If the seller fails to fulfill their obligations outlined in the contract, the buyer can usually demand the return of their earnest money.

3. Failure to Appraise: In cases where the property's appraised value is lower than the agreed-upon purchase price, the buyer may be able to withdraw from the deal and have their earnest money returned.

Situations where the seller is owed earnest money

On the other hand, there are situations where the seller may be entitled to the earnest money. These include:

1. Buyer Defaults: If the buyer fails to fulfill their obligations as outlined in the contract and the deal collapses due to their actions, the seller may retain the earnest money as compensation.

2. Termination Outside of Contingencies: If the buyer decides to terminate the contract for reasons not covered by contingency clauses and the seller can demonstrate that they suffered financial losses as a result, they may be entitled to the earnest money.

Mortgage options and the importance of exploring them

When it comes to purchasing a home, financing plays a crucial role. Buyers should explore different mortgage options to find the one that best suits their financial situation and long-term goals. In today's market, where interest rates can fluctuate, it's essential to be well-informed about your mortgage choices.

Two popular mortgage options are conventional loans with a 3 percent down payment and FHA loans with a 3.5 percent down payment. Understanding the differences between these options is vital.

Conventional Loans vs. FHA Loans

Conventional Loans (3 percent Down Payment)

• Conventional loans are not backed by the government.

• They typically require a minimum down payment of 3 percent.

• Borrowers with higher credit scores may qualify for more favorable interest rates.

• Private Mortgage Insurance (PMI) is required if the down payment is less than 20 percent.

• These loans are suited for buyers with strong credit histories and stable financial situations.

FHA Loans (3.5 percent Down Payment)

• FHA loans are backed by the Federal Housing Administration (FHA).

• They require a minimum down payment of 3.5 percent.

• Borrowers with lower credit scores may qualify for these loans.

• FHA loans typically have more lenient qualification criteria.

• Mortgage insurance is required for the entire loan term.

• Given the current scenario of an 8 percent interest rate on loans, the choice between these two options becomes even more critical. A higher down payment can reduce your monthly mortgage payment and the overall interest you'll pay over the life of the loan. So, while a 3 percent down payment may seem enticing, a 3.5 percent FHA loan might be a more feasible option for those with lower credit scores or who don't have the financial means for a larger down payment.

The role of a knowledgeable real estate agent

To navigate these complex waters successfully, it's essential to have a knowledgeable real estate agent on your side. A competent agent not only guides you through the process but also ensures you're fully aware of your options and the potential consequences of your decisions.

• Your agent should be well-versed in various financing programs, have a deep understanding of earnest money, and be skilled in negotiations. They should explore multiple strategies to ensure that the deal is structured in a way that aligns with your best interests. With their expertise, they can help you make informed choices that will increase your chances of closing the deal.

• In conclusion, knowing your options when you're under contract in real estate is of paramount importance. Earnest money serves as a symbol of commitment in a real estate transaction, but it's essential to understand when it can be returned to the buyer and when the seller may be entitled to it. Additionally, exploring different mortgage programs, such as conventional loans with a 3 percent down payment and FHA loans with a 3.5 percent down payment, can make a significant difference, especially in a high-interest rate environment. Finally, having a dedicated and knowledgeable real estate agent by your side is crucial to ensure that you make the right decisions and have clear expectations as you navigate the intricate world of real estate transactions. With the right information, strategy, and support, you can increase your chances of a successful and smooth closing on your dream home. <

Tia Morrell is a REALTOR for Landing Real Estate in Windham. Call her at 207-317-1833 or send her an email at

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