What’s the Deal on Earnest Money

What's the Deal on Earnest Money

Consider earnest money a show of good faith that you are serious about buying a home. 

This is important for sellers: After you and the sellers agree on a contract, the sellers might agree to take their home off the market while they wait for the results of your home inspection and the home’s appraisal. 

When you deposit earnest money, you show sellers that you are committed to moving ahead with the deal, meaning that these sellers won’t need to worry that they are missing out on additional offers by taking their home off the market. 

When do you deposit earnest money? 

You’ll make your earnest money deposit after you sign a contract to purchase the home. The contract will typically state how much earnest money you are depositing. 

This money is deposited into an escrow account and is held there until the appraisal and inspection are completed and you and the seller move to the closing stage of the home-buying process. 

How much should you deposit? 

The size of your earnest money deposit will vary. Typically, sellers expect buyers to deposit from 1% to 3% of the home’s purchase price.

If you are buying a $320,000 home, you’ll usually need an earnest money deposit of $3,200 to $9,600. However, you and the sellers can negotiate the final amount. 

How much you pay in earnest money might depend on how hot the real estate market is in the community in which you are buying. If the market is hot and sellers are receiving multiple offers, you might need to provide an earnest money deposit of 5% to 10% of your home’s purchase price. 

That’s a significant amount of money and is another reason why it is so important to build your savings before you begin searching for a home.

What happens to earnest money? 

When you close on your home sale, you can either receive your earnest money as a lump sum payment or use it to help cover your mortgage loan’s closing costs or down payment. 

Say you made an earnest money deposit of $5,000. If your down payment is $12,000, you can use your earnest money to pay for $5,000 of this amount while using other savings to cover the remaining $12,000. 

What happens if the home sale doesn’t close? 

You might receive a refund of your earnest money deposit if your home sale falls through. This depends on whether the reason for the canceled sale is your fault or the seller’s. 

If your home inspection uncovers serious problems with a home that is expensive to fix, you might be able to walk away from the sale without losing your earnest money. If the seller terminates the home sale without providing a valid reason, you’ll typically receive a refund of your earnest money. 

But if you find what you consider a better home and cancel the sale? You’ll usually lose your earnest money.