Earnest Money: how much is enough?
You found the perfect home and you’re ready to make an offer. To show the buyer you’re serious – particularly in a competitive market – most real estate agents will recommend including earnest money with the offer.
This article will give an overview of what earnest money is, how to protect yourself when offering an earnest money deposit, and how to choose the right amount of earnest money – and use it to your advantage when making an offer.
What is earnest money?
Earnest money, also known as a good-faith deposit, is an amount of money that shows sellers that you are serious about purchasing a home. The amount, which is typically 1-3% of the asking price of the home, helps protect the seller in the event that the sale falls through. Earnest money also helps reassure sellers that a buyer is serious about purchasing the home rather than making multiple offers on various homes.
If the transaction goes smoothly, the earnest money amount is applied to either the down payment or closing costs at closing. However, if the buyer backs out of the contract, the earnest money reverts to the seller; this helps cover the costs of relisting the home again. However, if the contract falls through due to issues with the home inspection or other contingencies outlined in the contract, the buyer gets their earnest money back.
How much earnest money is enough?
There is no set “right” amount of earnest money; the amount a buyer chooses to offer depends on a variety of factors. In a slow or buyer’s market, for example, buyers may be able to get away with offering less earnest money. In a hot market where multiple offer scenarios are common, however, a higher good faith deposit can help your offer stand out.
A real estate agent is often the best resource for how much earnest money is enough. In a situation where you may be competing with others for the same property, a higher earnest money deposit is ideal; if your offer is rejected, your earnest money will be returned to you. In general, most agents advise putting down 1-3% of the asking price of the home as an earnest money deposit. If the home costs $300,000, for example, an earnest money deposit of $3,000 would be entirely appropriate.
Protecting your earnest money deposit
There are a variety of ways to protect your earnest money deposit; this helps ensure you will get the money back in the event the deal falls through.
Use an escrow account
While uncommon, the real estate market isn’t immune to fraud. Because of this, use a third party, such as a title company or escrow company, to hold your earnest money. Transfer the money to the third party – and make sure to keep a receipt for your records. The funds can then be held in the escrow account until closing.
Pay attention to contingencies
Most real estate contracts have a variety of contingencies that allow either the buyers or sellers to back out of the deal without penalty. Pay attention to the contingencies written into your contract; this can ensure you don’t lose your good faith deposit in the event the deal falls through.
Keep up with your responsibilities
Purchase agreements often include a timeline for the closing process; this protects the buyers and sellers from escrow being drawn out indefinitely. Missing deadlines, such as when financing needs to be verified or when the inspection has to be completed, may give the sellers grounds to back out of the contract – and keep your earnest money.
Have it all in writing
Buying a home is the biggest purchase most of us will ever make. To ensure it goes smoothly – and to protect your investment – make sure everything is in writing. Make changes and updates to the real estate contract as necessary; if closing is pushed back due to a delay in scheduling the home inspection, make sure it is explained in detail to avoid voiding the contract.
by Author, June. 17, 2020