That $8,000 first time homebuyer tax credit may be mighty tempting for property newbies. Who seriously wouldn’t want some “free” money to decorate that new home, buy a side-by-side stainless steel refrigerator, or build a privacy fence in the back yard for your dog Barkley?
To qualify for the tax credit, though, you still have to qualify as a buyer. The FHA has announced new rules expected to be in place by summer that will make it more challenging to borrow on a federally guaranteed loan when purchasing a home. For example, new borrowers will need a minimum credit score of 580 to qualify for the 3.5 percent down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10 percent. Also, sellers will only be able to pay up to 3 percent in closing costs on behalf of the buyer rather than the previous 6 percent.
In addition to these expenses, a real estate buyer may also need to come up with funds for an appraisal, a home inspection, and – first and foremost – the earnest money. Why do you need to pay earnest money? How much money should you put down? What happens to your check when you’ve written it?
Why?
Earnest money shows a seller you are serious about buying the house. A typical offer will contain contingencies to purchase: the inspection contingency, the financial contingency, and appraisal contingency. If any of these contingencies are not satisfactorily met (if you can’t get a home loan, how can you buy?), you may walk away from the purchase and have your earnest money returned. If all of these contingencies are met and a buyer gets cold feet, the earnest money warms them right back up by holding their feet to the fire on the purchase. The earnest money shows that the buyer truly desires to buy the home.
How Much?
How much earnest money you put down is up to the buyer and the seller. The more down, the more serious the offer. I would recommend a buyer offer at least $500, but if it’s a very expensive home you’ll need more. The rule of thumb is “just enough to make it painful for the buyer to walk away.”
Where Does the Earnest Money Go?
The agent does not just “hold” the earnest money check. It is deposited in a broker account- called an escrow account- separated from operating funds. (So make sure when you write a check, you have the funds to cover it!). When you close, the money is applied to either the purchase price of the home, your closing costs, or sometimes buyers are refunded the amount.
As you consider taking advantage of the $8000 tax credit, remember… it will take some money in advance to make the home purchase. Save your money, make sure you’re qualified with a lender, and talk to your favorite middle Tennessee real estate agent to find out what to do next!
Posted by:
Kathy Tyson