Understanding Earnest Money Deposit for a Home Purchase

Regarding home purchases, submitting a good faith deposit, also known as an earnest money deposit, is crucial for showing the seller that you are serious about buying their property. But how much should you deposit? And what happens to your earnest money throughout the process? This comprehensive guide provides all the information you need to know to avoid losing your earnest money while making an offer on a home.

Key Takeaways on Earnest Money

Earnest money shows sellers you are serious and committed to buying.
Deposits are typically 1–2% of the purchase price.
Contingencies in the offer can protect you if you need to cancel.
- Work closely with your real estate agent on the earnest money process.
Only risk what you are comfortable losing if you default.
Funds are credited at closing; you don't get the deposit back.

What is Earnest Money in Real Estate Transactions?

Earnest money refers to a monetary deposit buyers put down when making an offer on a home. It shows the seller that you are serious about purchasing the property. If the deal goes through, the earnest money is held in an escrow account and applied to closing costs.

How Much Should You Put Down for Earnest Money?

Typical earnest money deposits range from 1–2% of the home's purchase price. So, on a $300,000 home, you would submit $3,000–$6,000 in earnest money with your offer.

The amount can vary, though, based on local norms and the property type. More expensive homes often require more extensive deposits. Discuss appropriate amounts with your real estate agent.

Why Do Buyers Need to Put Down Earnest Money?

As a buyer, submitting earnest money with your offer shows:

You are financially capable of purchasing the home.
You are serious about following through if the seller accepts your offer.
You are willing to risk the deposit if you default on the deal.

It reassures sellers that they should consider your request over others that don't include earnest money.

How Does the Earnest Money Process Work?

The typical earnest money process goes as follows:

Determine the deposit amount with your real estate agent.
Submit earnest money along with your purchase offer. This is often a personal check.
The seller does not hold the earnest money check; the title company or escrow agent does.
If the request is accepted, the deposit is applied to your down payment and closing costs.
If you cancel, the seller may be entitled to keep the earnest money.

Work closely with your agent to understand the solemn money procedures in your state and your transaction.

Why is Earnest Money Important for Home Buyers?

Putting down earnest money as a buyer does a few key things:

It shows the seller that you are financially committed and serious about purchasing.
It provides some security for the seller if you default on the deal.
It gives you more leverage to negotiate terms if you make a sizable deposit.

Earnest money is a vital good-faith gesture when offering a home.

Is Earnest Money Refundable? When Do You Lose It?

Whether earnest money is refundable depends on the terms of the purchase agreement.

It is usually refundable if the seller defaults or can't provide a clean title.
Buyers often lose earnest money if they cancel the contract through no fault of the seller.
Contingencies like home inspections can allow buyers to cancel while protecting their earnest money.

If you need to cancel, work with your agent to determine the best approach to try and get your deposit back.

How to Protect Your Earnest Money Deposit

Take these steps to help protect your earnest money deposit:

Only put down an amount you are willing to lose if you default.
Build contingencies like financing, an appraisal, and a home inspection into your purchase offer.
Ask for a substantial due diligence period to evaluate the property's condition.
Only submit earnest money with offers you are serious about moving forward with. Don't tie up your money unnecessarily.
Seek professional guidance from your real estate agent and legal counsel as needed.

Can I Use a Personal Check for the Earnest Money Deposit?

You can typically use a personal check when submitting earnest money and your purchase offer. Cashier's checks or wire transfers may be required at times, though.

Discuss the payment options with your real estate agent before writing the offer to ensure your earnest money deposit is made correctly.

What Happens to My Earnest Money After Closing?

Once the real estate transaction closes, your earnest money deposit will be credited toward the purchase price and applied to your down payment and closing costs.

The earnest money provides a portion of the funds needed to close, so you don't have to bring as much cash to the closing table.

Summary

In summary, earnest money shows a home buyer's good faith and serious intent to purchase the property. It is typically submitted with an offer directly to the seller or the seller's real estate agent.

If the deal falls through, the buyer risks losing their earnest money deposit unless the contract provides certain protections or the seller defaults. Work closely with your agent when negotiating a solemn money agreement and purchase contract terms to maximize your chances of returning your earnest money if you need to cancel the transaction.

Having contingencies in place and only putting down an amount you are comfortable forfeiting can help safeguard your deposit. While there is risk in putting down earnest money, it is a necessary part of demonstrating you are a severe buyer by making a good-faith offer when seeking to purchase a home.

SOURCE:
Earnest Money Deposit
How is an Earnest Money Deposit Verified?