What buyers need to know about earnest money deposits and how much to put down.

While home buyers aren’t required to put down earnest money, most sellers won’t consider, let alone accept, an offer without a deposit. Here’s what home buyers need to know about earnest money.

Why earnest money deposits are made

Home buyers include earnest money (sometimes called a good faith deposit) with a purchase offer to show that they’re serious about purchasing a home. The money is held in an escrow account until the sale closes; at closing the funds are applied to the down payment. However, if the buyer backs out of the deal for any reason not covered in the purchase agreement, the buyers forfeit the money, and it goes to the seller.

There are some scenarios where a home buyer may get their earnest money back if the sale doesn’t go through. One example is when a purchase agreement includes a contingency that the property has a clean title. If the property title is found to have defects, such as an outstanding lien that cannot be resolved before the closing date, the buyer can choose to walk away and have their earnest money returned.

Other contingencies that may allow buyers to back out of a home purchase and keep their earnest money include things like selling an existing home to finance the new one, a satisfactory appraisal, discovering major problems with the home itself during inspection, the ability of the buyer to finance or failure of the seller to perform agreed-upon repairs.

A home buyer who changes their mind about buying a home would not be entitled to get their earnest money deposit back and the seller would keep the money.

How much earnest money to put down

It’s common for home buyers to put down an earnest deposit equal to 1% to 3% of the purchase price. In some markets, a fixed amount, such as $5,000 is the norm. Talk to your real estate agent to see what’s typical where you’re looking to buy.

When you may want to put down more

In a competitive seller’s market or with new construction, buyers may put down as much as 10% in earnest money.

When is earnest money due

Earnest money deposits are usually required to be made quickly after a purchase agreement is accepted by a seller. Expect to make your deposit within two to five days. The purchase contract will state when the deposit is due.

Get mortgage pre-approval

Earnest money is one way to show home sellers that you’re serious about home buying. Another way is to get pre-approval for your mortgage. Pre-approval assures sellers that you can afford the home and gives them more confidence that you’ll go through with the purchase.

 

All loans subject to approval. Rates, terms, and conditions are subject to change and may vary based on credit worthiness, qualifications, and collateral conditions. Federally Insured by NCUA