When Buying a Home, What is Earnest Money?

If you have ever purchased a home before, you are likely to be familiar with the term “earnest money”, but not its definition or purpose. So, what is earnest money? Sometimes, what it signifies, and what the amount means, can be a little vague. To make a long story short, the purpose of earnest money is to serve as a deposit on a home you want to buy, and to show the sellers your earnest intent on purchasing the house. It is an initial investment in the purchase of a home.

Typically, the seller specifies the minimum amount of earnest money required for the purchase of the home. When that happens, it makes the whole process easier. But other times, the buyer is required to offer an unspecified amount and this leaves many people with the looming question, “How much earnest money should I put down?” In reality, it depends on the strength of the market. A lot of home sellers will look at the earnest money amount and gauge the buyer’s financially stability. In a weak real estate market where buyers have all the power, sellers cannot be too picky and cannot read too much into the amount offered. In this case, $500-$1000 might be enough.

However, in a stronger market where sellers are receiving dozens of offers, a buyer wants to extend extra-earnest in order to ease any seller worries. While 1% of the purchase price is usually enough, if you have your heart set on a certain property, offering upwards of 2-3% can help tilt the scale in your favor.

No matter the amount offered, many buyers still come back to the looming question of what is earnest money and what happens to it. Like most deposits, the money will go towards the final down payment and closing costs. If, for some reason, the contract on the house falls through, the buyer is usually entitled to a refund on the earnest money, up to a certain point. If you are feeling a little buyer’s remorse after submitting your earnest money, be sure to communicate with your realtor about when the earnest money “goes hard”, or becomes non-refundable. This usually happens once all parties are in agreement of the contract and all inspection items have cleared.

Just remember that earnest money is a statement of how earnest you are in purchasing the property and serves as a deposit. In a seller-dominated market, an earnest money amount can help juice up an offer and push you closer to the house of your dreams! And be sure to keep in mind that your realtor is an expert and is best to offer advice on how much earnest money will help you close the deal.