When you’re about to make an offer on a home, your real estate agent will ask how much “earnest money” you’d like to put down. Earnest money is a type of security deposit, also known as a “good faith” deposit, made to the seller of a home. It represents your intent to buy the property by showing the seller you’re serious about purchasing the property. In most cases, earnest money can also act as a deposit on the property you’re looking to buy.
This Redfin article gives an overview of what earnest money is, why you need it, and how much you may need, and how to protect the money once you deposit it.
What is earnest money in real estate transactions?
Earnest money is the money you pay after a home seller has accepted your offer on a house and before closing on the home. Earnest money assures the seller that you as the buyer are acting in good faith, and it provides them with some compensation in case you back out of the deal without a valid, contractual reason.
Once the seller’s agent is able to confirm that your earnest money has been deposited into an escrow account, the buyer and seller will enter into a purchase agreement and the seller’s agent will mark the listing as a pending sale — in effect taking the property off the market. At this stage, various inspections, appraisals, and possibly other contingencies you had in the offer contract move forward to finalize the sale.
Who keeps earnest money if the deal falls through?
If the buyer backs out, the earnest money is paid to the seller. If the deal falls through due to something coming up on the home inspection that would be prohibitively expensive (like a cracked foundation) or any other contingency listed in the contract, the buyer gets their earnest money back.
How much earnest money do you need to offer?
The buyer and seller can negotiate the earnest money deposit amount, but it typically ranges from 1% to 3% of the sale price, depending on the market. However, if…