Earnest Money: What Is It & Why Do You Have It?

Home buying is both a destination and a journey. The process of buying a home involves many steps, including the provision of an earnest money deposit. If homeownership is your desired destination, then you should learn more about earnest money, including how much to deposit and how to avoid losing it.

What Is an Earnest Money Deposit?

An earnest money deposit is the funds a seller submits as part of an offer to purchase a home. Though not legally required, the deposit is required by nearly all sellers.

Why Are Earnest Money Deposits Important in the Home Buying Process?

The deposit intends to demonstrate to the seller that the potential buyer makes the offer to purchase in good faith. The money provides assurance to the seller that removing the house listing from the market will ultimately result in either a sale or compensation for that lost time. An earned money deposit shows the buyer is serious, or earnest, in the intent to buy the house. In competitive markets, depositing a greater amount of earnest money can sway the seller to select that buyer’s offer.

How Much Earnest Money Should Be Offered?

The amount offered for an earnest money deposit will depend in part on the competitiveness of the market as well as on the seller, who might request a specific amount in the purchase agreement. The seller’s particular circumstances also will influence the earnest money deposit amount. Typically, the earnest money amount is one to five percent of the home’s sale price.

When Can the Seller Keep the Earnest Money?

The home buyer might lose all or some of the earnest money deposit if the terms of the contract are not met. The contract should specify when the deposit can be retained by the seller. Typically, the buyer forfeits the deposit:

  • If the buyer fails to respond in writing for contractual extensions, such as a home inspection or financing.
  • If the buyer gets cold feet and decides not to buy the house and walks away from the deal.
  • If the buyer finds a more preferred property and does not proceed with the purchase.
  • If the deposit was nonrefundable to make the offer more attractive to the seller.

When Can an Earnest Money Deposit Be Returned to Buyer?

Usually, when the home sale is completed without issue the earnest money deposit in escrow is applied to the downpayment or closing costs. Its disposition should be detailed in the purchase agreement. But if issues do arise during the home buying process, some circumstances would refund the deposit and return the earnest money to the buyer. The contract should include contingencies to allow for situations where the buyer can walk away from the sale with the earned money deposit returned to them. Common contingencies include finding problems with the house after the home inspection or failure to secure financing for the purchase price.

If you are looking to begin your home buying journey or already have begun, an experienced trusted real estate agent can guide you along the path to homeownership. Let LemonBrew connect you with a local agent perfect for you.