The financial aspect of buying a house can be incredibly overwhelming. There are so many confusing loop holes and if you don’t have help, it can feel insurmountable. While you’re shopping around, there are two terms that can seem interchangeable, but are truly two separate things. Due Diligence Money and Earnest Money, they both seem like the same thing, but understanding the difference can make the offer you’re putting down a little less daunting. Some of your questions may include how they are different, what they mean for you as a buyer, how much it will really add up to, and what happens if someone pulls out of the contract. We are here to help you out!
The first question is, what is it? Due Diligence is an agreement that is designed to protect both the buyer and seller. Due diligence is a fee paid by the buyer directly to the seller, which the seller keeps no matter what. However, the good news is that if the deal closes, the money that you put down as due diligence, can be credited towards your closing. The most important thing to know is that once you have paid DD, you will not get it back. It is also important to note that there is not only a due diligence fee, but also an agreed upon due diligence period. This fee allows the buyer to complete “due diligence” at the their own expense. This could include inspections, appraisals, review of documents, survey, financing, obtaining insurance, and any other things that you as a buyer feel important to investigate before buying. This process gives you the right to back out for any reason before the diligence period is up.
Earnest money on the other hand is considered to be “good faith” money. It is proof to the seller that you are a serious buyer. When you as a buyerenact a purchase contract, that contract specifies how much money you are willing to putting up to secure the contract, as a sign of “good faith”. The good news is that if the seller backs out, you will get that money back. Earnest money is refundable if the contract is cancelled within the due diligence time period. However, if are the one who decides to back out after the diligence period, the seller gets to keep that money. Should you decide to go through with the closing of a house, the earnest money is credited toward the purchase at closing.
There is no definite amount of money that is to be collected for either due diligence or earnest money. This all depends on the agreement between you and the seller. All in all, never be shy when dealing with the financial aspect of buying a house. There are so many things to keep track of that it is better to ask questions first!
