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What Is Earnest Money in Real Estate?
If a buyer puts down earnest money, they will typically submit the deposit shortly after the seller accepts their offer. The funds are usually held by a neutral third party, such as an escrow company, title company, real estate brokerage or attorney.
The purpose of earnest money is to protect both sides of the transaction. From the seller’s perspective, accepting an offer often means taking the home off the market, turning down other potential buyers and committing to the closing process. If you walk away for a reason not outlined in the contract, the seller may be entitled to keep the earnest money as compensation for the lost time and opportunity.
From the buyer’s perspective, earnest money helps strengthen the offer and shows that you are prepared to purchase the property. If the transaction closes successfully, the deposit does not become an extra fee. Instead, it is typically applied to what you already owe at closing, such as the down payment or closing costs.
How Much Is an Earnest Money Deposit?
There is no set amount for an earnest money deposit, but most buyers put down about 1% to 3% of the home’s purchase price.
For example, if you’re buying a $300,000 home, your earnest money deposit might be between $3,000 and $9,000. The exact amount can vary depending on the local market, how competitive the market is and the details of the home. In a competitive market, buyers may choose to offer a higher deposit to make their offer more appealing, while a lower amount may be acceptable when there is less competition.
It is also important to know that earnest money is negotiable. If earnest money is part of the offer, the buyer and seller agree on the amount during the offer process, and it is then included in the purchase contract.
A competitive deposit can strengthen your offer, especially in a tight market, but you should never offer more than you can comfortably afford to have tied up during the transaction.
The Bottom Line
Earnest money is a part of many home purchases, but it is still a financial commitment that can come with some risk. Whether or not your earnest money is protected comes down to the details of your contract. Make sure you understand what you’ve agreed to before you put down the money and make sure you can hold up your end of the deal. Ask questions if anything is unclear. A little extra attention upfront can help you protect your money.
