Mortgage Basics 6: The Deposit
On every purchase transaction the seller is going to make you put in a deposit into escrow.
Why is it required?
When you enter contract with a seller to buy their home, they have to take their home off of the market for the duration of the escrow period (usually 30-45 days). They want to make sure that you are seriously trying to buy the property and hold some money for insurance in case the loan or deal falls through.
In southern California the deposit amount is typically 1% of the purchase price.
$300,000 purchase will most likely require a purchase of $3,000 within 48 hours of an accepted offer.
What can I use for deposit money?
Deposit money has to be either your funds, or gift funds that can be sourced. You can not use a unsecured loan, credit card or cash for the deposit.
What counts as a deposit that can be sourced?
The underwriter must properly source the deposit to ensure their is no fraud involved with the incoming funds. What that will typically mean is they will want to see a bank statement and transaction history showing the funds coming out of your account into escrow or if it is a gift, your relatives paper trail documentation for the check or wire into escrow.
Can I lose my deposit money?
You will have a "loan contingency" in your contract. Typically this gives you 21 days from the time the offer was accepted to get full loan approval and release your deposit money from escrow to the seller. A great loan officer will make sure that you do not sign off on this until you have full approval. You could potentially lose this money though if you sign off on the contingency and your loan falls through after the money has already been released to the seller.
What happens to my deposit money at close?
If you chose a 0% down loan and have seller/ lender/ agent credit that covers your closing costs, there is a possibility you could get your full deposit back. Because this rarely happens, usually the deposit money will go towards your closing costs or down payment. If you put more funds into escrow than needed, escrow will send you a refund of the difference at close.
What if I am already in contract and put in a deposit that can't be sourced?
If you put in a deposit that can't be sourced, such as cash, it is difficult to fix. Basically, escrow will hold the initial deposit in escrow and the lender will require an additional deposit, this time it must be sourced, to be put into escrow. So now you have to put about 2% deposit money in escrow, and you can only use the money you can source (the additional 1%) toward closing costs and deposit. The money that was not able to be sourced is returned to you at the close of escrow.