How Earnest Money Works in Homebuying

An earnest deposit can give you an edge in a competitive market. Unlike a down payment, which goes toward your loan, an earnest deposit shows the seller you’re serious about buying their home. It’s a sign of good faith that makes it less risky for the seller to take their home off the market.

So how do earnest deposits work, and how much earnest money should you give? Here’s what you need to know.

How much is an earnest deposit?

Sellers typically expect to receive 1-3% of the purchase price. For example, a $400K home would likely require a deposit between $4K and $12K. But in a highly competitive market, that number can go much higher.

An expert real estate agent can help you determine what’s reasonable for the market (and your budget).

How does the process work?

An earnest deposit is typically made one to three business days after an offer is accepted. Funds are delivered via cashier’s check or wire transfer and held by an escrow company or real estate attorney.

Once the transaction is complete, the funds are distributed according to the terms of the purchase agreement. Usually, earnest money is put towards the down payment or closing costs.

What if the deal falls through?

If the deal fails due to a contingency, earnest money is refunded to the buyer. For example, if a house fails inspection, an inspection contingency protects your money.

If no contingency is in place, the seller may elect to keep your funds as compensation for the time their home was off the market.

How can I protect my money?

Use an escrow account, read your contract and resist the urge to waive contingencies (e.g., inspection, appraisal). While doing so may be appealing to sellers, it can put your money at risk.

Consult your agent about which contingencies to include and what’s needed to stay protected.

Any questions? Get in touch today.