What is an earnest money deposit and how much should you put down?

This money is a show of good faith that can go towards closing costs. But if you walk away from the home purchase, you'll only get your deposit back under certain conditions.

Elissa

Elissa Suh

Published May 7, 2020

info
Advertising Disclosure

KEY TAKEAWAYS

  • Earnest money deposit represents the buyer’s commitment to purchase a property from the seller

  • When you make a purchase offer, putting down more earnest money can distinguish you from another potential buyer

  • You can lose earnest money if you walk away from the transaction for a reason that is not specified in the purchase contract

  • Earnest money deposits can be applied toward a down payment or closing costs

In a real estate transaction, an earnest money deposit is a show of good faith that you will purchase a home. Buying a home is a costly and time-consuming process for both the buyer and seller alike. To let a seller know you’re a serious buyer, you must typically agree to put down some money, called an earnest money deposit, when you sign the purchase and sale agreement. There is no set amount you’re required to put down, but making a bigger deposit can set you apart from other buyers and make your offer more attractive to the seller.

You can think of an earnest money deposit as an early payment towards your home. The money will be held in an escrow account until you close and then applied toward closing costs or even your down payment. The deposit is money that would have been paid, but you simply paid it ahead of time.

However, if you decide you don’t want to follow through with the purchase for a reason that’s not specified in the purchase agreement, then you may not get the money back. The buyer can only recoup the earnest money under certain circumstances, such as when they can’t get financing and have a contigency in place to protect them.

In this article:

What is an earnest money deposit?

An earnest money deposit, also called a good faith deposit, is money that a buyer pays toward the purchase of a home as a show of commitment to. The deposit helps to assure that a buyer is not wasting the seller's time. The buyer has serious interest in buying the house-- they're not just window shopping.

An earnest money deposit is not the same thing as a down payment. A down payment is one of the costs of a home purchase, which can directly lower the size of your mortgage loan. If your offer to purchase is accepted and you ultimately close on home, then you can apply the earnest money towards the down payment or closing costs.

How much earnest money should I put down?

When the buyer makes an offer to purchase a home, they will typically indicate how much earnest money they plan to put down. An earnest money deposit may run from 1% to 3% of a property’s purchase price, according to the National Association of Realtors, but making a larger earnest money deposit can set you aside from other buyers. In a competitive real estate market, when there are many potential buyers, people may put down even more.

An experienced real estate agent should be able to guide you on how to navigate the process and craft your offer, including how large of a deposit to put down. Remember that if your offer is declined, you can try to make a counter offer. Just make sure not to put down more than you can afford. You’ll have to make a wire transfer or write a certified check or a cashier’s check for the earnest money when the offer is accepted and you want to proceed.

policygeniusSymbolCenter

A mortgage makes a house your own. Insurance protects it.

Policygenius can help you find a homeowners insurance policy that fits your needs and your budget.

Getting your earnest money deposit back

The earnest money funds are kept by the real estate broker or in an escrow account managed by an escrow company or a title company while the home buying process continues. When you close on the house, the good faith money will be applied toward other mortgage costs, but if you don’t go through with the purchase then you might not get able to get it back.

A change of heart because you don't like your new neighbors is not a legitimate reason to cancel the deal — unless it’s actually stated in the home purchase contract. The contract also typically includes a timeline; if you don’t fulfill certain conditions, or contingencies (more on that next) by a specified deadline, then you may not be able to recoup the payment.

Contingencies protect the buyer by specifying when they can walk away from the transaction and still get the earnest money back. You can waive contingencies, but then you'll lose their protections, or even add new ones to meet your needs (a lawyer should be able to give you more advice). Here are the most common contingencies you’ll find in a real estate contract:

Financing contingency

A mortgage contingency allows the buyer to get the earnest money refunded if they’re unable to secure financing for the house.

(To prevent losing out on a house this late in the process, you should always get pre-approved for a mortgage. Some cautious sellers may not even accept a purchase offer if you don’t show them a pre-approval letter.)

Home inspection contingency

The sales contract may include terms about when the buyer can walk away based on what a professional home inspection turns up and specifies a deadline by when the inspection should be conducted.

Check out our ultimate home inspection checklist to know what to look out for. Problems with the house can end up costing you a lot of money if you don’t notice them before moving in.

Appraisal contingency

When a professional appraisal is conducted and your home is not worth as much as the purchase price then you may be able to break contract and get the earnest payment back. But, first, ask the seller to lower their sale price. If they decline, you may consider walking away.

Title contingency

Having a title contingency in place can protect the buyer if a title search reveals any issues of ownership.

Learn more about title defects, which are often called a cloud on title.

Home sale contingency

When you buy a home, you might need to sell the one you’re living in first. With this contingency, the sale won’t go through unless the buyer successfully finds someone to buy their current home.

Easy Money by Policygenius

Sign up for Easy Money by Policygenius, a free weekly newsletter with exclusive content, personal finance advice, and bonus offers.

Policygenius Image

About the author

Personal Finance Editor

Elissa Suh

Personal Finance Editor

Elissa is a personal finance editor at Policygenius in New York City. She writes about estate planning, mortgages, and occasionally health insurance. In the past she has written about film and music.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

Was this article helpful?

thumbsUp
thumbsDown