When making an offer on a home, you’ll need to decide how much you’re going to offer for the property and how much to offer in earnest money. The earnest money deposit is an important part of the home buying process. It’s an amount of money that is used to show sellers that a buyer is serious — or ‘earnest’ — about buying their home. Sellers rarely accept offers that don’t include an earnest money deposit.
Your real estate agent will help you decide how much earnest money to offer. In some cases, you’ll offer a set amount, such as $1,000. In other cases, a percentage of the amount offered on the home — such as 1% to 2% — is more appropriate. In the many competitive housing markets, an earnest money deposit of as much as 3% to 4% or more might be warranted. If you end up purchasing a home, your earnest money is typically held by a title company or the seller’s broker — depending on the state in which the transaction is taking place — and will be applied toward your down payment and closing costs.
Larger earnest money deposits — especially in competitive housing markets and in multiple offer situations — can signal to a seller that you’re serious. What happens to that money if the home sale doesn’t go through? A purchase contract should spell out instances in which an earnest money deposit would be refunded, such as if the buyer’s financing falls through, a home inspection finds a costly hidden defect or the home in deemed uninsurable.