Earnest Money FAQs

When you’re buying a home, you may come across terms that are unfamiliar. One of those terms may be “earnest money.” Exactly what is earnest money, and how does it help you buy a home? In order to save you some time and frustration, here are the most frequently asked questions we’ve received about earnest money.

What is earnest money?

First of all, let’s be clear about what an earnest money deposit actually is. It is the money you put down towards a home that signals to the seller you are serious about your offer. It is also sometimes called a “good faith deposit” because it shows that you really do want to buy the house.

How much is an earnest money deposit?

You can expect to pay between 1-5 percent of the purchase price of the home as an earnest money deposit. The amount of your deposit will depend on where you live and how competitive the real estate market is. When in doubt, consult with your real estate agent about how much to offer. Their expertise and knowledge of the local market can help guide you to offer the appropriate amount.

When do you make the earnest money deposit?

The earnest money deposit is paid after your offer is accepted and you have signed a purchase agreement.

What happens to the earnest money deposit?

The earnest money deposit is not paid directly to the seller. Instead, it is deposited in an escrow account until closing. At that time, the earnest money deposit is typically applied to the down payment and closing costs for the buyer.

When is earnest money refundable?

There are several situations where an earnest money deposit would be refundable if contingencies are stated in the purchase agreement. They include:

• During an option period – The option period is the timeframe where a buyer can cancel the purchase agreement and get the earnest money deposit back.
• Home appraisal contingency – If the home does not appraise for the agreed-upon selling price and the buyer backs out of the contract as a result, then the earnest money deposit is refundable.
• Title contingency – If a title search uncovers a lien on the title or a dispute of ownership, then the earnest money deposit is refundable.
• Home inspection contingency – If the home inspection reveals serious problems that force a buyer to back out of the purchase agreement, then the money is refundable.
• Financing contingency – If your financing for the home falls through, then you can cancel the contract and get your earnest money returned.
• Seller backing out – If the seller gets cold feet and terminates a contract, then the earnest money deposit is refundable.

When is earnest money not refundable?

As a buyer, if you pull out of a contract for a reason that is not clearly stated in the agreement, then you will forfeit your earnest money deposit to the seller.

Should I remove contract contingencies?

Although it may be tempting to remove contract contingencies to make your offer more attractive, it can seriously cost you. Unless you are 100 percent certain you will be able to close on the home, don’t give up your right to cancel the purchase agreement.

Courtesy of Virtual Results