The Ultimate Guide to Earnest Money

Incrementally stacked quarters with little plants growing out of them representing money and growth

When you go through the process of purchasing a home, you will likely experience a whole gamut of emotions: confusion, happiness, worry, and maybe even fear. While I can’t stop every emotion from filtering through you, (we like when you feel the good ones,) let me at least take some of the confusion out of the earnest money deposit.

What is Earnest Money?

Earnest Money is the Buyers good faith deposit that lets the seller know that you are committed to buying their home. It’s like an insurance policy for the seller. It gives the seller confidence that you, the buyer, are serious about buying their home. They want to know that you won’t back out of the deal on a whim or without good cause.

How Much Do I Need?

Generally speaking, earnest money should be 1-2% of the purchase price, but truthfully, it can be any amount that you want. Earnest money is one of the expenses that you have to come up with early on in the transaction. If you are working with a tight budget and a 0% down loan program, you may not have that much money to spare. If this describes you, just set aside what you can, and keep in mind that your earnest money will be applied towards closing costs at the time of closing.

On the other hand, if you can afford to put down a more substantial earnest money deposit, then you should consider doing so. If you’re in a hot, competitive market and a  multiple offer situation, the more you put down, the more attractive your offer may look to the seller.

For example: 

Let’s compare two different offers at the same purchase price. These two offers are the same in just about every way except offer number one has offered an earnest money deposit of $800 and offer number two has offered $5000. If you were the seller, which one could you choose? Does the 2nd buyer seem more committed to buying the home? Do you think they are less likely to walk away and forfeit their $5000? I do. I believe the 2nd buyer is the safer choice

If you don’t have $5000 to use as earnest money, don’t get discouraged. This example is to illustrate my point, not provide you with a cut-and-dry strategy. Every situation is different, and earnest money is not usually the most critical item to sellers. In addition, a low earnest money deposit can be compensated for in other ways. 

Remember, your earnest money applies towards your down payment or closing costs at the time of closing. If you have funds set aside for either of those, don’t be afraid to use those funds for your earnest money deposit

When Is Earnest Money Due?

While rules may vary from state to state, and from brokerage to brokerage, here’s the way my team and I handle your earnest money. We write the contract to state that you will deposit your earnest money to the closing agent within three days of mutual acceptance. You won’t need to write a check to make an offer. And you won’t need to write a new check for each offer you make. You also don’t make your check out to me, and you don’t make your check out to the seller. You deposit your money directly with the closing agent. The closing agent will hold the money until the closing date or until the contract is terminated for another reason.

Will I Get My Earnest Money Back?

The only way for you to lose your earnest money is if you breach the contract. Does this mean that once you have an accepted offer that you are locked in forever? No, not necessarily. In a real estate contract, we use several contingencies to give buyers time to do their due diligence. These might include a financing contingency, an inspection contingency, or a title contingency. You can request time to review the neighborhood and the HOA if there is one.  These contingencies have time limits, so once you have the house under contract, you must stay on top of your timelines. If you find something that causes you to want out of buying the home, you must be within the contingency period to legally terminate the contract and be refunded your earnest money.

Let’s look at an example: Let’s say we wrote your Purchase Contract to include a 10-day inspection contingency.  You will have ten days from mutual acceptance to conduct a home inspection and formulate a response for the seller. The inspector finds black mold in the house. Let’s say that you are no longer interested in the property because of the black mold. You’re not interested in having the seller remedy the problem, and you don’t want to deal with it yourself either. You want out of the contract so you can find a different house to buy. As long as you are within the 10-day inspection period, you have the right to terminate the contract legally, and the escrow agent will refund your earnest money promptly.

What's Happening in 2021

Here’s a little side note for 2021. It is a super hot market. Buyers and their Agents are pulling out all the stops to get their offer accepted. With so much competition, earnest money becomes even more critical. If you don’t have a lot to put down right now, keep saving as fast as you can. In addition to earnest money, some buyers are offering non-refundable deposits that go directly to the seller as soon as they accept your offer.

Now That You Know...

Now that you know all the details about earnest money, what other real estate questions do you have?

Send me a message, write a comment below, or message me on Facebook. You can find all my contact info at the bottom of this page. Let me know what your biggest concerns are when it comes to buying a house. I’m here to answer all your real estate questions.

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