What Is an Earnest Deposit and How Much Is Reasonable? 

Buying a new home, whether it is a new construction home or a resale home, comes with numerous costs that go above and beyond the purchase price. There are taxes, closing costs, and a variety of other fees that you will need to pay for upfront to secure your new residence. One of these is the earnest money deposit.

In short, an earnest money deposit is a deposit on the purchase of a house. It is paid to show you are serious about buying the home. With that in mind, let’s dig a little deeper into what an earnest money deposit is, why it’s important, and how much you have to pay into it.

 

What Is an Earnest Money Deposit?

An earnest money deposit is a deposit you put on the purchase of a home when you sign the purchase agreement with the seller. This deposit is basically a sign of good faith that you will follow through with the purchase, which is important because the seller will most likely take the house of the market once the purchase contract is signed.

 

If you were to then choose not to buy, perhaps because you didn’t have any contingencies in place for an unacceptable inspection or appraisal or simply because you found something you like better, the seller would have to relist and may even have to lower the selling price. Thus, the earnest money deposit protects the seller.

 

How Much Is an Earnest Money Deposit?

An earnest money deposit is typically between 1% and 3% of the purchase price of the home. The amount of the earnest deposit depends on a variety of factors, including the current market and the condition of the home. And if there is a lot of competition for the property, it can go as high as 10%.

The earnest money deposit is, in many cases, non-refundable should you choose not to buy the property after the purchase agreement has been signed. In some cases, the seller will set a fixed amount to weed out the buyers that aren’t serious. Otherwise, to find out the appropriate amount you should pay for the deposit, you should speak with your real estate agent, who should be able to provide you with a reasonable quote based on factors related to the market.

 

How Is an Earnest Money Deposit Paid?

The earnest deposit money is typically deposited into an escrow or trust and left in the care of a third party. This third party could be a real estate broker, title company, or lawyer. The deposit is made with a personal check, certified check, or wire transfer.

The earnest money deposit will sit in the escrow until the closing of the sale, at which time it will be applied to your down payment or the closing costs. You can also choose to get the earnest money back, if you already have your other costs covered.

 

Your Earnest Money Deposit May or May Not Be Lost

While it is true that you can lose your earnest money deposit, there are situations in which you can get your money back. You will typically lose your deposit if you waive your contingencies related to securing your financing or the results of the inspection or appraisal. You can also lose your deposit if you don’t adhere to the timelines set out in your contract.

Your contingencies are your protection against losing your earnest money deposit. As long as you have them in place, you can get your deposit back if:

  • The home inspection turns up major issues with the home.
  • The amount of the appraisal is lower than the purchase price.
  • Your financing falls through.
  • You are unable to sell your current home before closing on the purchase of your new home.

It is vital that you go over these contingencies with your real estate agent or lawyer. These are the only situations in which you would get your earnest money deposit back. In virtually any other situation, you will lose that money.

 

How to Protect Your Earnest Money Deposit

With the above in mind, you will want to protect your earnest money deposit. In order to do this, you will need to do the following:

  • Put the money in an escrow account.
  • Make sure everything is in writing.
  • Have a full understanding of the contingencies you put in place.
  • Follow through with all your responsibilities and do so on time.

Your earnest money deposit is your way of letting the seller know you are serious and securing the property you want to buy. This is important when making such a big purchase.

 

Reach out to us today for more information about an earnest money deposit and other aspects of the home buying process.

 

Looking for more Foundation tips and learning? Return Home here.

Published 02.24.22

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