Homebuying 101: Earnest Money Deposit

Home Buying

You’ve found the dream home and you are working with your real estate agent to submit an offer and the question comes up: “How much earnest money are you going to put down with the offer?”

The earnest money deposit is one of the most important parts of the contract process outside the actual offer itself. The deposit shows the seller how committed you are with your offer and how ready you are to move forward toward closing.

If your offer is accepted, then those funds go toward your down payment and closing costs.

Your purchase and sale agreement will detail the terms of your earnest money deposit. Generally, it indicates that you are willing to pay the seller the earnest money amount if you back out of the sale prior to closing. Often, your purchase and sale agreement will detail reasons that will allow you to leave the contract without forfeiting your earnest money.

How Much You Should Put Down

On average you can expect to pay 1-2% of the total purchase price of the home. Depending on where you live, you may end up putting down more or less than this amount. In a slow market, your Realtor may recommend a 1% earnest money deposit. In markets that are hot, you may be asked to make a higher deposit of 2-3%.

A higher earnest money deposit may help make you look more attractive than other buyers making offers on the same property and may help you win a bid.

When Do I Pay the Earnest Money?

After your offer is accepted and you sign the purchase agreement, you turn in your earnest money to the title company. After you turn over the deposit, funds are held in an escrow account until the home sale is in final stages. Once everything is ready, these funds are released from escrow and are applied to the down payment and closing costs for the home.

If We Leave the Deal, Can We Get Our Earnest Money Back?

It’s always a good idea to check the purchase agreement to be sure it covers how a refund will be handled. If the deal falls through for any reason, a cancellation fee may be taken out of the earnest money deposit. The escrow company, as holder of the earnest money, determines whether you should receive funds back based on the terms of the agreement.

Understanding the potential impact an earnest money deposit has on your offer is a great way to give you another tool to put yourself in a strong position to buy. Make sure you work closely with your  real estate agent and home loan company to put in a strong earnest money deposit that matches your interest level, while also understanding the terms of the purchase and sale agreement.

Need more information on how to prepare for homeownership? Contact a local home loan expert.

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