Buying a home comes with upfront costs, including the down payment, closing costs, and earnest money. Show
What is earnest money?Earnest money definitionEarnest money is an upfront payment, also known as a deposit, that demonstrates your intent to buy a home. By paying earnest money, you’re showing that you’re serious about the purchase. “At closing, the earnest money deposit is credited toward the buyer’s purchase of the home,” explains Lee Hunt, a senior loan originator with Motto Mortgage Simplified in Aiken, South Carolina. How does earnest money work?The purpose of an earnest money deposit is to show the seller that the buyer is serious about their offer by putting some “skin in the game,” says Bill Golden, associate broker with RE/MAX Around Atlanta. “It lets a seller know that the buyer intends to comply with the terms of the purchase and sale agreement,” Hunt says. In most cases, you’ll need to deposit the earnest money within a day or two after your offer is accepted. The funds are then held by the real estate brokerage in an escrow account while you and the seller work to finalize the deal. In Georgia, the earnest money is held by one of the real estate brokers in the transaction, or sometimes by an attorney, Golden says. Is earnest money required?Earnest money is not required by law, but it is standard practice, and the “majority of sellers demand it prior to accepting a contract,” Hunt says. How much earnest money should I put down?The amount of earnest money you’ll need to pay is typically 1 percent of the home’s purchase price, but it can depend on the type of transaction and the nature of the broader market. On a $355,000 home, for example, you’d put down $3,550 as an earnest money deposit. “In this competitive market, many buyers are offering significantly more to make their offer stand out,” Golden notes. Because most real estate agreements have contingencies to protect you as the buyer, handing over more earnest money to give you a leg up comes with relatively little risk. “As long as you pay strict attention to the dates and terms of all contingencies, a buyer’s earnest money is safe — as long as they don’t just try to walk away for a reason not included in the contract,” Golden says. Is earnest money refundable?“Earnest money is refundable under certain conditions, depending on how the contract is written,” Golden says. “Most contingencies in the contract — including the inspection or due diligence period, the financing and the appraisal contingencies — protect the buyer’s earnest money.” So, if a deal falls through due to issues with the home inspection, for example, you’ll get your earnest money back. Here are some common contingencies that allow you to recoup your deposit:
If all the contingencies have been met, however, and you still back out of the deal, you’re likely to lose your deposit to the seller. “Contracts are very specific about the process in which the earnest money would be disbursed in such cases,” Golden says. How to protect your earnest money depositYou can protect your earnest money deposit in two ways:
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Why earnest money is required when buying a homeEarnest money is a good faith deposit made by the buyer during a real estate transaction. It signals to the seller that you’re serious about purchasing their property — and it also protects them in case the deal falls through. You’ll pay earnest money after a seller accepts your offer. In exchange, the seller will typically take the home off the market to signal that they’re also committed to the sale. Many first-time home buyers wonder how much earnest money to pay and whether or not they get it back. Keep reading to understand how earnest money works and the role it plays in the home-buying process. In this article (Skip to…)
How earnest money worksEarnest money is a sum of upfront cash that a buyer extends to the seller to show they’re serious about purchasing a property. If the deal closes, then the earnest money acts as a deposit toward the buyer’s down payment. But if the sale falls through, the earnest money is either refunded to the buyer or kept by the seller. How the deal fell through will determine who gets to keep the funds. We go into this in more detail below. You will need to hand over the earnest money check to escrow within one to two days of the seller accepting your offer. That’s why it’s good to have liquid funds available before making an offer. You don’t want to submit an offer, only to realize that you need time to sell stocks, borrow from your 401k, or get a gift from a relative. How much earnest money do I need?The amount of earnest money you’ll need varies greatly based on the housing market, the home purchase price, the area, and how many offers you expect the home to get. Your real estate agent or Realtor will be able to guide you on the specific amount of earnest money you’ll need. “Typically, it’s a specific percentage of the home purchase price — usually around 3% to 5%,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO. As you might guess, hotter real estate markets and more desirable areas will require larger earnest money amounts. In low-cost areas with little competition, earnest money checks of $500-$1,000 are not unheard of. How is earnest money paid?Earnest money is a regular check, cashier’s check, or wire transfer from the buyer. It doesn’t go to the seller right away. Instead, it gets deposited into an escrow account with a real estate broker, title company, or attorney. The seller considers earnest money “received” when they get word that funds are deposited with the escrow company. An escrow company is simply a third party that holds all money involved in the real estate transaction until the sale is complete. Is earnest money refundable?If a home sale falls through, the buyer’s earnest money may or may not be refundable. It depends on the reason the sale was canceled. If you place contingencies (conditions) in the purchase agreement, and the home or seller doesn’t meet those agreements, you can get your earnest money back. For instance, say you agreed that the home would appraise for the sale price but it came in lower. If you had an appraisal contingency written in, you could back out of the deal and get your earnest money back. Here are a few common contingencies that allow buyers to keep their earnest deposits.
On the other hand, if you just don’t feel like buying the house anymore or back out for a reason not covered by a contingency, then the seller may have the right to keep your earnest money. Before you submit earnest money, make sure you are serious about buying the home. How to protect your earnest money depositWith all the details and tasks involved, it’s easy for potential buyers to switch to “autopilot” during the home-buying process. But remaining vigilant during the final stages of purchasing a home can ensure that you keep your earnest money should the deal fall through.
Earnest money FAQIs earnest money required? While buyers are not legally obligated to make a deposit, earnest money is customarily required in most real estate markets across the country. Not agreeing to offer a percentage of the home’s purchase price upfront could put a buyer at a disadvantage and jeopardize the transaction. Is earnest money needed when you refinance your home? No, an earnest deposit is not necessary when refinancing your current home. Earnest money is a good-faith gesture buyers make to sellers when purchasing a new home. Your mortgage lender will not require any earnest money when you refinance. (However, you will have to pay closing costs on the loan.) Who keeps earnest money? An earnest money deposit is typically held by either the seller’s real estate brokerage or in an escrow account with a third-party title company, bank, or legal firm. The home purchase contract should detail where the deposit will be kept. Is earnest money applied to my down payment and closing costs? Yes. Your earnest money does not just go away. Rather, it is applied to your down payment when you close the home loan. So you can think about earnest money as a piece of the down payment you’re putting up in advance. Do you get earnest money back? If a sale goes through, the buyer’s earnest money is applied toward their down payment at closing. But buyers can also get earnest money back if the sale falls through for a reason covered by their purchase agreement. This could mean they backed out because issues were uncovered during the home inspection or the property appraised below its purchase price. The sales contract will list any contingencies that allow the buyer to back away from the purchase and keep their earnest deposit. How do you lose earnest money? It’s possible to lose earnest money if the home sale falls through for a reason not covered by your contract. You may lose your earnest money if you cannot complete the real estate purchase by its closing date. Being unable to close, for whatever reason, is considered a breach of the purchase agreement, which results in forfeiting earnest money. Buyers commonly lose earnest money when they fail to meet deadlines or fail to secure a home loan. Who gets earnest money when buyers back out? While it depends on the situation, the buyer will typically keep the earnest money if they back out for a reason that is allowed by the contract, such as a home inspection contingency. On the other hand, the seller gets to keep the earnest money deposit when the buyer backs out because they’ve simply decided not to go through with the deal or they have waived contingencies. How do I get approved to make an offer on a house?If you’re ready to take the first step toward buying a home, you’ll need a mortgage preapproval. This initial loan approval tells you your budget and gives you the power to make an offer on a home. You can begin the preapproval process by connecting with a lender below. What is the lowest amount of earnest money deposit?While the buyer and seller can negotiate the earnest money deposit, it often ranges between 1% and 2% of the home's purchase price, depending on the market. In hot housing markets, the earnest money deposit might range between 5% and 10% of a property's sale price.
How much is earnest deposit?Generally, a buyer will deposit 1% to 2% of the purchase price in earnest money, but that amount can be higher depending on your agreement. It will be held in an escrow account and applied to the rest of your down payment at closing.
Who keeps earnest money if deal falls through?If a buyer defaults on one of their commitments or time frames, they will lose their money. If, however, the buyer backs out of the transaction due to one of their contingencies, the seller will not be able to keep the earnest money. When choosing an escrow company there can be many important factors to evaluate.
How much is earnest money in real estate?It's typically around 1 – 3% of the sale price and is held in an escrow account until the deal is complete. The exact amount depends on what's customary in your market. If all goes smoothly, the earnest money is applied to the buyer's down payment or closing costs.
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How much earnest money do you need
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