Earnest money says to a seller, ” I’m serious about buying your house, and this proves it.” This article explains what earnest money is, who to give it to, and how to protect yourself and ensure you don’t lose the money.
Rate Search: Compare Mortgage Rates and Offers
What is Earnest Money?
Earnest money is a deposit a buyer gives to a seller showing they want to buy the home and will hold up to their end of the purchase agreement.
The initial home offer will specify the amount and terms. Earnest money may be deemed non-refundable after a set period of time, called an option period, unless the seller and buyer agree on conditions in which the deposit would be returned.
The funds are held in an escrow or trust account until closing, where the funds are used towards the home’s purchase price. It is not to be confused with a down payment or closing costs.
How Much Earnest Money is Needed?
The amount of earnest money will vary depending on the market. There is no set amount, but usually, it equates to 1%-2% of the purchase price. In some cases, however, there are times when an escrow deposit of $1,000 will do; it all depends on the seller.
As a buyer, you should always try to get away with the smallest amount of money the seller will accept. So if you need to back out of the contract you can and will not lose as much. With that said, sellers will be trying to get a larger deposit.
In a buyers market where home sales are slow, you should be able to put a smaller deposit down on a property because you may be the only offer. In a seller’s market, however, where multiple bids are commonplace, the seller will likely require a larger deposit.
It would be best to work with an experienced real estate agent who can help guide you throughout the buying process, including how much of a deposit is enough.
Will Earnest Money be Refunded if a Buyer Cancels?
If a buyer cancels a sales contract during the option fee, then the earnest money will be returned to the buyer. However, if the buyer cancels the contract after the option period, the earnest money deposit is generally considered non-refundable.
How to Protect Your Earnest Money Deposit?
You should include a timeframe in which you can cancel the purchase agreement and keep your earnest money.
A real estate contingency needs to be met for the contract to be valid. For instance, a financing contingency allows you to cancel the contract if your financing falls through legally.
Contingencies to Include
A financing contingency states that the agreement is contingent upon mortgage approval. If your loan is denied for reasons outside your control, then you should be able to get your earnest money deposit back.
Must Sell Current Home First
If you have a home now that you must sell before you can qualify for a new mortgage, this contingency protects you. If you cannot sell your home and, therefore, cannot complete the sale, you can back out of the contract. Sellers are not thrilled to accept this type of contingency, so it may lower your chances of having your home offer accepted.
Home Appraisal Contingency
The home appraisal is what lenders use to determine the market value of the home. A home appraisal contingency protects you in the event the appraisal comes back lower than the sales price and you are unable to secure financing. This will allow you to either renegotiate the price or back out of the purchase contract and have your earnest money returned.
The home title, or property deed, is a document that shows the house’s legal owner. A title company will run a title check to ensure the seller has the legal right to sell the property and no liens on the title.
Home Inspection Contingency
A home inspection is something that is paid for and set up by the buyer. It’s not required but highly recommended. If you have a contingency covering the home inspection, you can have the seller pay for any repairs that need to be completed before closing.
Who Do You Give Your Earnest Money Deposit To?
You should never give an earnest money deposit to an individual. Do not give the deposit directly to the seller or even your own real estate agent. There have been fraud cases where persons identifying themselves as agents or sellers con potential homebuyers into giving them money then never being heard from again.
You should always make a check out to a third-party such as a reputable real estate brokerage, title or escrow company, or law firm. Make sure you keep a copy of the check for your records and get a receipt.
Earnest Money FAQ
Is earnest money refundable?
There is an option period in which the earnest money is refundable. After this, if the buyer cancels the real estate transaction, the money is usually considered non-refundable. At closing, the money is usually put towards the purchase price of the home.
How much earnest money is required?
No set amount of earnest money is required. It varies depending on the market, but typically it is between 1%-3% of the purchase amount.