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What is Earnest Money and How Much Do I Need?

At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.

For most Americans, buying a home for the first time is a financial balancing act. You’re likely weighing your resources to make certain you’ve planned properly for a down payment, closing costs, and a monthly mortgage payment. But the first financial step toward making it all happen is presenting an offer with earnest money.

In this post, we’ll help you get a full understanding of that first step, and how to avoid a misstep that could mean the difference between getting the home you want or having your offer rejected by the seller.

Step One: Talk to a Top Buyer's Agent

A top buyer’s agent can help you make the best offer on that home you love and protect your earnest money. Tell us a little bit about your plans, and we’ll connect you with trusted agents in your selected market. It takes only a few minutes, and it’s free.

What is earnest money in real estate?

Earnest money, also known as a good faith deposit, is the funds that a buyer puts down to show that they are serious about purchasing a piece of real estate from a seller. The buyer typically gives 1% to 3% of the sales price as an earnest money deposit (EMD). However, these percentages vary depending on the housing market, local economy, and supply and demand in the area.

The main purposes of earnest money are to:

  • Show the seller that you’re a serious buyer with “skin in the game” and something to lose.
  • Make your offer look better and stand out; the more earnest money you put down, the stronger your offer is.
  • Reward the seller for taking their home off the market.
  • Protect the seller in case the buyer backs out of the deal .
  • Give the buyer time to complete the home purchase, get a mortgage, title insurance, an appraisal, and home inspections
  • Give the buyer security that no one else can purchase the property unless they default on the contract.

Earnest money is generally given with a signed purchase agreement. So, your real estate agent writes up your offer on the house, including the sales price, closing dates, and any contingencies. And with that contract, the earnest money is given. It’s then held in an escrow account until closing. At closing, the earnest money is put toward the buyer’s closing costs.

For example, if you make an offer on a $500,000 house and leave a 3% earnest money deposit, that $15,000 will be deducted from what you owe at closing, as long as the deal goes through.

Now that you know more about earnest money, check out HomeLight’s home affordability calculator to see how much home you can afford based on your income, savings, and monthly debt.

Is earnest money always required?

“Earnest money isn’t required by law in Georgia, but it’s always recommended,” says Tonya Byrd, a top-performing Atlanta area real estate agent. It gives weight and validity to your offer. It’s rare that a seller will take an offer seriously without an earnest money deposit.

The seller doesn’t want to waste their time and money and lose out on other potential buyers by taking their house off the market if the earnest money isn’t received.

Why should I provide earnest money?

You should provide earnest money to strengthen your offer, to show the seller that you’re serious, and to encourage the seller to take their house off the market for you. “The seller isn’t going to take their house off the market based on your word. They want to see the funds to back up the offer,” says Byrd. Earnest money gives the seller peace of mind that this is a serious offer that will most likely result in a sale.

How does earnest money work?

The purchase agreement will dictate what happens to the earnest money if there is a default from either party. It will also lay out contingencies and due diligence dates. Contingencies can be for things like a mortgage, an appraisal, and passing a home inspection.

There are a few scenarios where the seller may get to keep the earnest money if the buyer defaults, and other times the buyer will get their earnest money back if the seller hasn’t fulfilled the promises on their side of the contract.

Byrd has experienced times when the seller couldn’t deliver a clean title to the house for whatever reason, and because this was a contingency in the contract, the buyer got 100% of their earnest money back.

“I had a deal almost fall through because the listing agent failed to disclose that the property wasn’t approved for an FHA loan, and getting an FHA loan was a contingency for my buyer purchasing the house. Thankfully, we were able to restructure the deal, my client didn’t lose her earnest money, and she still bought the house,” relays Byrd.

Earnest money vs. down payment: Is there a difference?

Although the terms “earnest money” and “down payment” are often interchanged. They are not the same thing. Earnest money is not dictated by a lender, and it has nothing to do with the loan. It’s just a good faith amount given with the purchase contract.

Conversely, a down payment is the amount that you’re putting down on a house with a mortgage. A lender may require 20% down as part of their loan conditions. This amount is separate from your earnest money. You will need to show your lender that you have the funds for the down payment during underwriting, and you will need to show where they came from.

To learn more, check out HomeLight’s simple down payment calculator.

How much earnest money should I give?

“Earnest money is generally between 1% and 3 % of the sales price,” according to Byrd. Earnest money isn’t a set amount, it’s up to the discretion of the buyer. Typically, a real estate agent will advise the buyer on how much earnest money to leave as a deposit. It may be typical to leave a larger earnest money deposit in a “hot” or active market like California, where there are multiple offer situations.

If you don’t want to lose the house, you may decide to leave 10% as your earnest money deposit. The larger your deposit, the stronger your offer, so it can be advisable to leave more. Just make sure you keep up your end of the deal so you don’t forfeit the money.

In addition to earnest money, keep your other homebuying costs in mind, such as how much you will need as a down payment and how much closing costs will be required to purchase the home. Also, remember things like homeowners insurance, HOA dues (if applicable), landscaping, and maintenance costs.

To learn more, try HomeLight’s closing cost calculator.

When is earnest money refundable?

There are certain situations that may occur when earnest money is refundable such as:

1. Unfavorable home inspection (Home Inspection Contingency)
If you have a home inspection contingency clause in your purchase agreement, and the house comes back needing a new roof and has plumbing issues, you will be entitled to receive your earnest money back. You also have the option of purchasing the house anyways or asking the seller to make the repairs or give you a credit at settlement.

2. Low appraisal (Appraisal Contingency)
All buyers who are getting a mortgage will have an appraisal contingency; the lender requires it. If the contract says the house needs to appraise at $800,000 for your loan to be approved, and it only appraises for $750,000, you get your earnest money back as the buyer. Keep in mind that if you really want the house, you can pay the difference in cash, if the lender agrees, or you can ask the seller to reduce the price based on the low appraisal.

If you’re a cash buyer, an appraisal contingency is always recommended. That way, if the house doesn’t properly appraise, you can decide if you want to move forward or not.

3. Mortgage not approved (Financing Contingency)
If a buyer has a contract with a mortgage or finance contingency and they can’t obtain a mortgage for whatever reason, they will get their earnest money deposit back. This is why sellers prefer for buyers to either pay all cash or to not have the contingency at all.

If a buyer didn’t have the financing contingency in place and was declined for a mortgage, they would be obligated to purchase the home or lose their earnest money.

4. Can’t sell your existing home (Home Sale Contingency)
If you have a home sale contingency in the purchase contract, and your existing home doesn’t sell by the stated date, you will be entitled to getting your earnest money back as the buyer. The seller may not be happy about it, but legally, the contract is enforceable.

This is also why it’s important to keep the earnest money in a trusted professional’s escrow account because things can get tense, and you don’t want a disgruntled seller to have access to your deposit.

Should I waive contingencies in my purchase offer?

The strongest offers have the least amount of contingencies. That being said, consult with your real estate agent and/or attorney before signing the contract. Also, know your financial situation. Are you willing to purchase the house with cash if you can’t get a mortgage, or are you willing to lose your earnest money if the house needs a multitude of repairs and you choose to walk away?

It’s always safer for the buyer to use contingencies, but too many clauses may frighten the seller and lose you the house anyway.

Who keeps earnest money if a deal falls through?

Who keeps the earnest money if a deal falls through all depends on the contract and what it says will happen to it. It also depends on who is to blame for the deal falling apart. If the seller promised to deliver a house with a clear title and they can’t, then the buyer will get their earnest money back.

If there was an appraisal contingency and the house appraised for less, and the buyer and seller can’t work out the difference, the buyer will get the earnest money back.

However, if the buyer finds a neighboring house she likes better and decides to purchase it and not close on the original house, she will lose her earnest money deposit.

There may also be scenarios where the real estate agent gets to keep a portion of the earnest money deposit as payment for their services. This varies by state and must be clearly stated in the agreement of sale to be enforced.

How can I protect my earnest money?

You can protect your earnest money by giving it to your real estate broker to keep in their separate escrow account. Or you could give it to your real estate attorney to keep in their escrow account. This way, no one can access the funds until closing or until a default has been proven.

In addition, as we’ve discussed above, there are things you can do as a buyer to avoid forfeiting your earnest money, which include:

  • Understand your purchase agreement
  • Get pre-approved for a home loan
  • Make an offer on the proper home for your needs
  • Avoid making multiple purchase offers
  • Shield your deposit with contingencies
  • Choose a lender with an earnest money guarantee
  • Pay attention to purchase agreement timelines
  • Raise issues early
  • Void purchase agreements correctly
  • Check your state and local laws about earnest money deposits

Learn more about protecting your earnest money at this link.

Conclusion: Earnest money is key in getting your offer accepted

Giving an earnest money deposit is part of making a reasonable offer to purchase a home. It strengthens your offer, shows that you’re serious and that you have something to lose if you default. It gives the seller a reason to take their house off the market and sell it to you.

HomeLight can connect you with a top buyer’s agent who can help you make the most effective offer on your dream home with the best combination of earnest money and contingencies.

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