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Real Estate Tips

Earnest Money Explained

Earnest money helps you to secure your dream home. Looking into how earnest money works will prepare you get the home you have always wanted.

When you are going through the home buying process a lot of real estate terms are thrown at you. We know these can easily become confusing. Earnest money deposit is one of these terms. Thankfully though, with some explanation it all will make perfect sense. Now, let’s take a look at earnest money explained.

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What is an Earnest Money Deposit?

An earnest money deposit is a statement saying that you are serious about purchasing the home a seller is offering. It is a show of good faith that you are not just leading the seller on. Earnest money insures that the home is taken off the market while financing, appraisals, and inspections are done. Allowing you the time to complete all the paperwork and tasks needed to be done, without fear of someone else purchasing the home. The terms of the deposit are outlined in the sales contract or purchase agreement. The deposit is then delivered when these documents are signed. Lastly, the funds are kept safe and applied to your down payment or closing costs.  

How Much You Should Expect to Pay

The earnest money deposit can always be negotiated between the buyer and seller. It is typically between 1% and 2% of the purchasing price of the home though. So for example, if the home was $250,000 and you were paying 2% in an earnest money deposit, then the deposit you make would be $5,000. While this is standard, the interest level, or demand for the home, can affect the amount the seller asks in a deposit. If the home is a hot commodity, and there are multiple buyers trying to secure the home for themselves, the deposit could range from 5% to 10% of the purchasing price. 

The higher the earnest money deposit, the more serious the seller will take you. Therefore, it is important to offer a high enough deposit to catch the attention of the seller. Although, not high enough to put yourself in jeopardy. If the sale falls through for any reason and the deposit is not refundable, you do not want to have offered enough to put your financial standing in severe risk. 

Who Do You Give Your Earnest Money Deposit To?

Your deposit should never be given to the seller directly. Nor should the check be made out to the seller or even your real estate agent. The check should always be made out to a reputable third party. Such as a real estate brokerage, escrow company, or law firm. It is also important to keep a copy of the check for your records and get a receipt. 

How to Protect Your Earnest Money

To further explain how earnest money works, we will evaluate a few things you can do to make sure your deposit is protected. Including contingencies in your contract is the number one way to ensure your deposit is protected and refundable. Contingencies state specific situations in which the contract can be fairly broken. Thus allowing you to be refunded your deposit. 

Contingencies for financing and inspections. Without contingencies for these processes it is easy to lose the deposit if the sale falls through for lack of financing or a failed inspection

Must sell your current home first. If it is required of you to sell your current home in order to qualify for a new mortgage, this contingency saves you. If for any reason you are unable to sell your current home and need to back out of the sale, this allows you to receive your deposit back. Sellers are not happy including this type of contingency so it may hurt your chances of securing the home. 

Home appraisal contingency. A home appraisal is done to ensure that the price the seller is selling the home for is indeed how much the home is worth. If the appraiser comes back with a much lower price than was originally agreed upon, you are able to renegotiate the price or back out of the sale completely. 

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Securing Your Dream Home 

An earnest money deposit is standard practice when purchasing a home. It is how you give enough confidence to the seller to take their home off the market. While earnest money is a pretty simple concept, there are a lot of legal aspects involved. Such as the contingencies placed on it, and specific amount outlined in the contract. Due to these elements, it is recommended that you seek the advice, or complete services, of a trusted real estate agent. They will be able to guide you in your search, and the securing of your dream home.

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