Earnest money, also known as a good faith deposit, is money put down by a buyer in a real estate transaction to demonstrate that they’re serious about purchasing the property. This mechanism is designed to protect the home’s seller in case the sale falls through, since they’ll be taking the house off the market as the process moves forward. Earnest money is generally 1% to 3% of the purchase price, is usually held in an escrow account and gets applied toward final closing costs once the sale is finalized. Read on to learn more about how earnest money works and how much you should plan to pay.
How does earnest money work?
Earnest money is used as a show of good faith to the seller that the buyer is making a serious bid on their home. If the buyer is unable to fulfill their end of the contract, earnest money is used to cover any costs the seller incurred during the negotiation process. Once the buyer signs the purchase agreement, the earnest money is usually placed in an escrow account until the sale is finalized. At that point, the balance is applied toward closing costs.
When is earnest money due?
The purchase contract should state when the earnest money is due. Usually, the money is due as soon as the seller accepts the offer or soon after.
Is earnest money required?
While earnest money isn’t always required, it’s a good idea to offer earnest money if it’s a competitive market. This will help distinguish you as a serious buyer and encourage the seller to choose your offer over others. In many cases, a seller may choose not to accept an offer without a good faith deposit.
Is earnest money refundable?
Earnest money is refundable under certain circumstances, or contingencies, which should be stated in the offer to purchase. These contingencies may be related to the home inspection, the appraisal, financing and the sale of an existing home. If the seller cancels the contract, the buyer’s deposit will be returned to them.
What happens to earnest money?
If the sale goes through, the earnest money goes toward the buyer’s down payment or closing costs.
When the seller keeps the money: If the buyer cancels the purchase contract for a reason not covered under the contingencies in the contract, the seller is permitted to keep the earnest money.
When the buyer keeps the money: If the seller backs out of the agreement or the buyer cancels the contract and is protected by a contingency in the contract, the money is returned to the buyer.
How much is earnest money?
Expect to pay between
1% to 3%
of the home’s price
in earnest money.
Earnest money is usually between 1% to 3% of the home’s purchase price. However, in a very competitive market, it can be as high as 10%. On a $250,000 house, this can range from as low as $2,500 to as high as $25,000. The buyer can adjust the amount of earnest money to make a more competitive offer or the seller may request a certain percentage before accepting the offer. In some markets, a fixed, flat-fee earnest money deposit may be more common than a percentage.
The amount of earnest money you put down depends on the market and how many other offers the seller is considering. To make a very competitive offer, consider putting down earnest money of 4% or 5%. For a house with an asking price of $250,000, this will be between $10,000 and $12,500.
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