Earnest Money 101

You include earnest money with an offer on a house to show the seller that you are serious about purchasing the house. It becomes part of the down payment if the offer is accepted, is returned if the offer is rejected, or is forfeited if you pull out of the deal for reasons other than those stipulated in the offer.

A financing contingency is an example of the latter - if your offer was contingent on getting a loan, and you can't, you can cancel the contract and get your earnest money deposit back.

How Much Earnest Money?

The size of the earnest money deposit is up to you. It is generally about 1% of the home’s asking price, or $1000, but may be any amount.

Naturally, an offer with one dollar of earnest money may not be taken seriously, and the other agent may even persuade the seller to reject your offer. It is a good idea to stick to the local norm.

You can also do a two-part deposit. You can make an offer with just $100 in earnest money, for example, but specify in the offer that this will be increased to $2,000 once the offer is accepted, or once when an inspection, appraisal or other contingency is met. This keeps your money from being tied up until you know that the seller is serious about selling to you. This will usually still be seen as a serious offer if the deposit is to be seriously increased at some point.

Who Gets The Earnest Money Deposit?

Never give your earnest money check to the seller. Make your check out to the seller’s agent’s office, and give it to your Realtor to hold until the offer is accepted. Once accepted, it goes to the seller’s agent’s office and is deposited to their escrow account to be applied at the day of closing. Always write a good check. They will cash it when the offer is accepted, and if your check bounces, you will more than likely lose the house. If the offer is rejected, the check comes back to you to destroy on your own.

What If?

If you pull out of the deal for some unforeseen reason - one not included in the contract - you'll lose your earnest money. There’s also a chance the seller might seek other legal remedies, which may include more fees and/or legally forcing you to continue with the purchase of the home. This isn’t intended to scare you from making an offer, but is intended to scare you from making a light, fun offer that you may not be serious about. In all, take the earnest money as a serious step to owning your newest dream!