ZERO DOWN: The Truth About Connecticut Home Purchase Deposits

Let’s first address the elephant in the room: A DEPOSIT IS NOT A REQUIREMENT when buying a home. So why then is it part of real estate transaction? Simply put, most reasonable home owners won’t take their home off the market while you perform a home inspection and attempt to secure your mortgage without some collateral otherwise known as a “good faith” or “earnest money” deposit. In 
most of New London and Windham counties in Southeastern and Eastern Connecticut, many homes close with less than $5000 used as a good faith deposit. In fact, most homes that sell for less than $250,000 have as little as $1000 as a good faith deposit.
Let’s look at this from both the buyer’ as well as the seller’s perspective.
Many buyers assume they should leave as little down as possible. In fact, if they could get away with leaving $1.00, many buyers would. In the standard Purchase and Sale Agreement used by the Eastern Connecticut Association of REALTORS, the seller has an obligation to the buyer governed by the terms and conditions set forth in the written agreement. In the event of a default by the seller, the buyer could be entitled to receiving their deposit back PLUS an amount equal to the deposit as liquidated damages. If you only leave $1.00, then you can recover $2.00. If you leave $5000, you may be able to recover as much as $10,000. Of course, you should to consult with your attorney and REALTOR when faced with such a situation. Point is, contrary to popular belief, your deposit is not only a collateral in the event of your default but it serves as collateral in the event of the seller defaulting.
When you are selling your home, the deposit given by the buyer is done so in good faith. If the buyer defaults on the contract, you may be entitled to keeping a portion or all of the deposit. Again, consult your attorney and REALTOR when faced with such a situation. It would be prudent to get a deposit large enough to make a buyer to think twice before defaulting or walking away from the sale. With that on mind, there are 2 parts of every real estate sale that often gets overlooked. Those parts are compassion and the other is common sense. Common sense would suggest that a buyer buying a home with a zero-down mortgage in a low price range is most likely not in a position to leave a large deposit and a requirement to increase their deposit may cause them to walk away. Compassion is applied when you as the seller looks beyond the paper contract to see what is not only best for your bottom line but also going to keep your buyer happy and invested in the purchase…especially if they are first-time home buyers.
Dispelling the NO MONEY DOWN Myth
So now that we got the deposit situation under control, is buying a home in Southeastern and Eastern CT likely? Short answer is “no”. Since we learned above that most sellers won’t take their home off the market without a good faith deposit, you as a buyer can assume you will need to come to the contract table prepared to write a check for probably not much less than $1000. This deposit has nothing to do with the fact that the type of mortgage you may be applying for has no deposit requirement. If the mortgage you are applying for is 100% financing, it is possible that you could receive your good faith deposit back at closing (conditions apply and it doesn’t always work out so perfectly) In addition to that, cash will needed prior to closing on your home purchase for your home inspection which can be as much as $1000 or more. In addition to that, when you apply for your mortgage, many lenders will require you to pay for your home appraisal up front. The inspection and the appraisal are generally costs that are paid within the first two weeks of being under contract to buy a home. The appraisal depending on the type of property can cost approximately $450. So up to this point, you potentially have written a check for $1000 for the good faith deposit, $1000 for home inspections and $450 for an appraisal all on a deal that is “no money down”. In many cases, you may also be required to pay for the 1st year of home owner’s insurance prior to closing. This also can be approximately $1000+/-.
Moral of the STORY
Save a few thousand dollars prior to buying your home. Your NO-MONEY down mortgage is only relative to your loan, not the other costs of buying a home. Consult a REALTOR!