UNDERSTANDING THE EARNEST MONEY
The payment shows the seller you’re a serious buyer
In an ideal world, if you found the home of your dreams, you and the owner could sign a purchase contract, followed by a handshake and, later, your down payment. In the real world, in order to prove your offer to purchase a property is “earnest,” or “in good faith,” you need to put money on the table as soon as the ink of your signature dries on the purchase contract.
This earnest money deposit is a fraction of your down payment which indicates the buyer’s intent and willingness to execute the agreements laid out in the contract with the seller. The buyer usually pays it in the form of a personal or certified check issued to the real estate brokerage of choice. The deposit will be held in an escrow account, a type of trust fund controlled by both the seller and the buyer, until you successfully complete the closing.
Earnest payment amounts vary widely. The attractiveness of the home’s sales price, the level of interest others have expressed in the property, and how quickly a prospective buyer can move from contract to closing can all influence the sum a seller may request as an earnest money deposit.
When do I need to deposit earnest money?
Usually, buyers are required to deposit their earnest money within three days of reaching mutual acceptance with the seller. This may vary by deal and by location, but the earnest money deposit is usually the first big milestone after mutual acceptance, and buyers should be ready to make their earnest money deposit as soon as possible after mutual acceptance.
How much earnest money do I need?
Earnest money is usually between 1% and 3% of the home's purchase price. For a $400,000 home, earnest money may range between $4,000 and $12,000. The earnest money amount is usually included in the buyer's offer; buyers may try to make their bid seem more "serious" by offering more earnest money.
Who gets my earnest money?
The earnest money deposit is held in reserve, either by an escrow firm or attorney, depending on the law in your state. Technically, nobody "gets" the earnest money until the sale is completed or canceled:
- If the sale is successful: the earnest money is applied to your down payment on the home purchase.
- If the sale falls through because of a failed contingency: you get the earnest money back without penalty.
- If the buyer backs out of the sale for reasons not covered by a contingency: then the seller keeps the buyer's earnest money.