What Is Earnest Money?

When you make an offer to buy a home, it's important to demonstrate your commitment from the start. This is usually done through an earnest money deposit, which shows the seller that you're serious about the purchase. Keep reading to understand more about this initial deposit and how it works. Earnest money is a deposit made by a buyer when purchasing a home, often called a good faith payment. It shows the seller you're serious about the purchase and committed to moving forward if the terms of the agreement are met. The deposit is typically large enough to keep you engaged in the process and gives the seller confidence to stop accepting other offers. A neutral third party, such as an escrow company or attorney, will hold the earnest money until the sale is completed or the contract is terminated. What is earnest money used for? Earnest money serves as a commitment from the buyer to the seller. In exchange, the seller takes the home off the market while both parties work toward closing the deal. If the purchase goes through, the earnest money is applied to the down payment. If the buyer backs out for a reason not covered by contingencies in the sales contract, the seller may keep the deposit to compensate for the time and missed opportunities. How much is earnest money? The amount of earnest money is typically between 1% and 3% of the home's purchase price. For example, a $300,000 home might require a deposit between $3,000 and $9,000. Your real estate agent can help you decide the right amount based on local practices and the competitiveness of the market. How much earnest money should I put down? Your earnest money deposit should reflect your commitment to buying the home. In competitive markets, putting down a higher deposit can help strengthen your offer. Your agent will guide you on what’s considered competitive in your area. Is earnest money required? While it’s not always required, earnest money is common, especially in competitive markets. Sellers prefer offers with an earnest money deposit as it shows serious intent to proceed with the purchase. When is earnest money due? Typically, earnest money is due within a few days after both parties sign the purchase agreement. Who holds earnest money? The earnest money is held in an escrow account by a third party, such as an escrow company or a real estate attorney. This ensures the money is handled fairly and according to the terms of the purchase agreement. How do you pay earnest money? Earnest money is usually paid by cashier's check or wire transfer. Personal checks are rarely accepted. Be sure to follow the instructions from your escrow company or attorney carefully to avoid potential scams. How to show proof of earnest money to your lender To show proof of your earnest money deposit, provide your lender with a receipt from the escrow holder and your bank statement showing the withdrawal. What happens to earnest money at closing? At closing, your earnest money is applied toward your down payment or closing costs. If any money is left over, it’s refunded to you. Is earnest money refundable? Earnest money is refundable if certain conditions, or contingencies, in the purchase agreement aren’t met, such as a failed home inspection or financing issues. If you back out for reasons not covered by the contingencies, the seller may keep the deposit. Can you lose earnest money? Yes, you can lose your earnest money if you back out of the deal without a valid reason outlined in the contract or if you fail to meet deadlines for your contingencies. How to protect your earnest money To safeguard your deposit, make sure your earnest money is placed in an escrow account, understand the contingencies in your contract, and meet all deadlines. Keep in close contact with your real estate agent and lender to ensure everything proceeds smoothly.