Bank asking for 10% of offer as earnest deposit. Thoughts?

Question

Hey guys!

So I made an offer on a foreclosure which I intend to fix up, live in with my wife as our first home for 5-8 years, pay off entirely and then rent out. The listing was $96k, I offered $97k cash ( my parents are helping out with the cash part via their 401k ). The bank countered my offer asking to move the closing date to Oct. 25th (no problem there), but then also asked for $9700 as the earnest money deposit (currently my earnest money dep is $1000). What should I do? It seems that increasing the earnest money is pretty low risk and I wouldn't want to lose the house just to make a point, but am I risking NOT getting the house by only raising my deposit to say $3k? What are your thoughts?

Stone Teran · Answer

If you don't have a lot of worries about the property (e.g. inspection concerns), then I would pay the earnest money that they request.  You'll get credit for it at the closing.

Vince Impellizzeri · Answer

So as it turns out it's not so much a counter as it is "here's what you have to do to comply with regulation". My realtor talked to the listing agent, and the listing agent said Fannie Mae requires a 10% EMD if the offer is all cash. It's non-negotiable apparently. So I ended up just doing the $9700 EM, but turns out I didn't have a choice if I wanted the offer to be cash. It was either that, or revert to conventional financing. So there's a lesson learned. Thanks everyone for all the input and help!

Darin De Luca · Answer

I say "go for it!" This sounds like a solid investment for you guys down the road!

Jeff B. · Answer

Consider the Contingencies (if any).  Usually REOs go as-is so once you're in escrow, you will close and the EMD doesn't matter at all.

If however, you're a lookie-loo and need contingencies, better not proceed.

Peter Tverdov · Answer

I don't see the big deal. I know in some areas they want the full down payment (conventional mortgages) upfront. 10% I have done on more than one occasion. It shows you're serious.

Wayne Brooks · Answer

On REO's here, and on my own listings, 10% EM is Standard on cash offers.  The question is, why not?  If you have the cash, you certainly have the 10%.  You have an inspection period, so What is the problem?  On the plus side, you may be competing against others with the same attitude of "that's too much", for no legitimate reason.  With multiple offers, someone Will put up 10% EM as again, there's no real reason not to.   It shows the bank you are serious, and also that you're not just some wholesaler trying to shop the property around willing to risk $1000 if they can't flip it right up until closing.  To me, it's an absolute no brainier.

Vince Impellizzeri · Answer

Thanks for the input guys! Yeah, this is a little different than a normal investment deal for us. I wouldn't pay this much or come in that strong with an offer if this was strictly an investment property, but rather this is a house can be a home for us, and someday will become an investment. In good condition it's ~130k, especially given the lot ( 1.3acres in the city). I would say this is a C house in an A area. Foreclosures rarely happen in this neighborhood. This house was on the market for 30 days @ 106k, 2 days ago they dropped it to 96k, the day after that I put my offer in, and at that point we found out there were multiple offers on the table. I didn't want to mess around, not get the house and then have to start paying rent where we're currently staying. That's the reason for the above list cash offer. Do you think the bank is likely to turn down the offer entirely if I come back with less EM than they requested? I'm willing to take some extra risk given this is more than an investment property for us, but I don't want to be dumb about it either. Which is why I'm asking you guys; to save me from my ignorance. :)

Joel Owens · Answer

Find out from the listing broker the rationale and reasoning the bank has for wanting more of an EM deposit. Once you find out their concern maybe there is another way to ease it.

Patrick Roob · Answer

Hey there,

Personally, I feel there are a few things that could be adjusted here. If this is your first home, did you think about using a conventional or even construction rehab loan to purchase allowing for you to leverage your ability to borrow (especially at today's low rates)? Personally, I did not purchase all cash and leveraged my ability to borrow, while keeping reserves in the bank allowing me to invest elsewhere.

As for the deal, if you're already coming in with a strong offer of ALL CASH which is ABOVE LIST, on top of this being your first home, I would not agree to it. EM of 10% is not required, especially on a relatively low-cost home, and is not required but is only an "overlay" or added blanket of security the bank is independently requesting. If a 10k EM deposit is unnecessary (in my eyes) for a home which is 100k.

Me personally, I would deny their request or find a different lender. Is there a reason you're offering such a strong offer? Is the competition that stiff? If those options did not work for you, maybe offer a concession of doubling your EM to 2k?

Thanks,Patrick

Russell Brazil · Answer

Well as a percentage amount it is high, but as a dollar amount it is not high.

However the size of an EMD is not entirely without risk. There is many ways you can lose your emd or have it tied up for a long period of time.

Bank asking for 10% of offer as earnest deposit. Thoughts?

Most Popular Reply