The earnest money deposit, aptly named, lets the seller know that you are a sincere and committed buyer. It’s also the first installment on your down payment and closing costs, assuming your offer is accepted. The down payment is the difference between the purchase price and the amount financed. The two terms, Downpayment and Earnest Money are often used (incorrectly) interchangeably.
A seller (under the advice of a good agent) will rarely accept an offer without earnest money. If earnest money were not required, you could make multiple offers on multiple homes, tying them up and taking them off the market until you decided which was the winner.
Earnest money proves to the sellers that you are a serious buyer and ready to purchase a home. The earnest money is credited back to you at closing, or will default to the seller if you cannot perform the details of the sales contract.
What’s the Right Amount for an Earnest Money Deposit?
An earnest money deposit of 5% to 10% of the sales price is common, but buyers might include a check for 1% with the offer, with the balance of that 5-10% payable after the contingency period had expired OR within a stated number of days. As an example, on a home priced at $300,000 a reasonable earnest money deposit would be $15-30,000. Expect to pay $3,000 on day 5, with the remaining $12-27,000 due after approximately 18 days. All of this money is part of your down payment, and will be credited to you at closing.
In a seller’s market (high demand, low inventory), making a larger earnest money deposit can work in a buyer’s favor. Conversely, when demand is low a seller may be willing to accept a smaller deposit. It’s also possible that a larger earnest money deposit may help offset a reduction in offer price.
When do We Make an Earnest Money Deposit?
It’s not uncommon to include a check along with your offer to purchase. Often, your agent will include a copy of the check when submitting the offer but not forward the actual check until the offer has been accepted. The agreement of sale allows 5 days from the date of execution (the date all signatures are done) unless otherwise stated, for the initial deposit to be made.
Who Holds the Earnest Money Deposit?
Your earnest money check should be make out to the brokerage of the seller’s agent. When an offer has been accepted, the deposit becomes part of your down payment. This money will be held in escrow until closing.
Never give the earnest money to the seller; it could be difficult or impossible to get it back if something goes wrong. After turning over the deposit, the funds are held in an escrow account until the home sale is in the final stages. Once everything is ready, the funds are released from escrow and applied to your down payment.
Down payment requirements are calculated as a percentage of the purchase price and vary by loan program and lender. Expect your mortgage lender to ask for anywhere from 3.5-20 percent down. Higher down payments often result in preferable loan terms and more options for the borrower, which is why so many people aim for the 20 percent mark.
Can We Get Our Earnest Money Deposit Back?
The escrow funds will be returned to you if you pull out of the agreement of sale as a result of any of the contingencies, so long as this is done within the due dates. Just as a renter puts up a security deposit to cover any damage, the earnest money deposit is meant to cover any breach of contract. For this reason, we will make every effort to meet the contingencies as required by the contract.
The Agreement of Sale specifies the responsibility and process for dispersing and returning earnest money.