What is an earnest money deposit?

When making an offer on a home, you will typically submit an earnest money deposit. This deposit shows the seller that you are deeply committed to purchasing their property. In most cases, this deposit is held in escrow until the date of closing and is then applied to your closing costs or down payment. The tips below explain why you should offer an earnest money deposit and what you should expect when you make an offer.

Why do I need to offer earnest money?

Earnest money is a way to ensure that your offer is taken seriously and that sellers aren’t bombarded with outrageous offers that won’t come to fruition. Without these deposits, homebuyers could essentially make offers on a multitude of homes and then choose the home with the best deal at the end. Earnest money protects both sides of the transaction and helps guarantee a smooth ride to closing.

How much should I offer in my earnest money deposit?

According to the National Association of REALTORS®, a typical earnest money deposit is between 1 to 2 percent of the home’s total price. In a low inventory market, buyers may increase their earnest money in an attempt to outshine other offers. However, every home and homebuyer are different, so it’s important to work with your REALTOR® for insights about how much earnest money you should offer.

When and where should I deposit my earnest money?

Earnest money is an indication of your commitment to purchasing the home, so you should aim to complete the deposit as soon as possible after your offer is accepted and the purchase agreement is signed.

The earnest money deposit will typically be held in an escrow account by the listing broker until closing. An escrow account is an impartial account that consists of all assets and documents before the sale closes.

Will I get my earnest money deposit back no matter what?

If the sale is successful, the earnest money deposit is generally applied to the closing costs of the home or the down payment. However, earnest money deposits—like all deposits—do carry some risk if you don’t meet the original terms of the offer.

When you submit your offer, your REALTOR will advise you of the necessary contingencies to include in the terms. Then, if the home purchase fails due to a failed contingency, your earnest money deposit will be returned.

Common contingencies include:

• Contingent on appraisal: Protects the buyer if the home’s appraised value comes in below the purchase offer
• Contingent on inspection: Protects the buyer if an impartial inspector reveals unsatisfactory housing conditions
• Contingent on financing: Protects the buyer if they are unable to find sufficient financing to purchase the home
• Contingent on home sale: Protects the buyer if they are unable to sell their home before the closing date

If the transaction is unsuccessful for reasons not covered by a contingency, such as the buyer decides to buy a different home, the seller is entitled to keep the earnest money deposit.

What else do I need to know about making an offer?

The earnest money deposit may seem a bit tricky, but you’re never alone in the home buying process. Your REALTOR will offer insights and walk you through every step, from finding the right home to securing the right loan.

Call, email or chat to get in touch with a home buying expert in your area today. And don’t forget to share your real estate experiences with us on Facebook, Twitter, Instagram and Google+ using #BuyerInsights and #SellerInsights.