People in the real estate business absolutely love their jargon. If you’re new to the home-buying process, you’re going to hear a bunch of stuff that will make you wonder if English is your native language. There’s stuff like bump and bumpable and estoppel certificate. And what in the world is earnest money?
Well, that one is kinda easy, so let’s get into it.
So what exactly is earnest money?
Earnest money is just money you put down as a good-faith gesture that you’re serious about buying a house. Typically, it’s 1-5% of the purchase price. While you wait to close on your house, the money is deposited into an escrow account with the seller’s broker, title company or escrow company.
Do you know that old cliché about storytelling? It’s better to show than tell. Earnest money is you showing the seller you mean business when it comes to buying their house. It gives them peace of mind to go forward into the next steps of the transaction. It proves you’re sincere—or earnest—about this purchase.
How much earnest money do I need?
The short answer is that you need 1–5% of the price that you and the seller agreed upon. The longer answer begins with: “It depends.”
Because it really does depend on a number of factors—mostly related to where you are. In some markets, you’ll need a fixed amount—like $1,000 or $5,000. In other communities, the focus is on the percentage. In really hot real estate markets like Silicon Valley, it’s not uncommon to see six-figure earnest money deposits.
That’s a lot of money! It’s important to have a real estate pro like one of our real estate Endorsed Local Providers (ELPs) in your corner to help you play by the rules in your area.
Do I get it back?
So what happens to your earnest money?
Just to be clear, earnest money is not your down payment. Your down payment is completely separate and should be 10–20% of the purchase price with a 15-year fixed-rate mortgage.
However, if everything goes the way it’s supposed to, the earnest money will get folded into your closing costs. But you’ll need to be careful and read your contract because there are several ways you could lose your earnest money deposit. Make sure your agent builds these contingencies into your contract so you can get back your earnest money.
- The home doesn’t get appraised at the offer amount. Maybe you make a $200,000 offer on a home that turns out to be worth only $150,000.
- The home doesn’t pass inspection. The home could have significant structural damage or need a new roof and you may not be able to come to an agreement with the seller to make the repairs.
- You can’t get financing. Things happen. Your lender could change ownership or you might encounter another hiccup in the finance process.
Sidenote: If you’ve been working the Baby Steps and have no debt (and therefore no credit score), a traditional lender may tell you to take a hike. In that case, talk to our friends at Churchill Mortgage. They’re experts at navigating the mortgage lending process and will truly put your first.
You’ll also want to pay attention to the deadlines in the contract. There will usually be a hard date for closing, and your real estate agent can really help you here. If it looks like it may take longer to arrange your financing than you originally thought, you may be able to renegotiate the date to keep things moving smoothly and save that earnest money deposit.
But keep in mind that there may come a time when you just want to walk away. Something unexpected —like an accident, a divorce or a dream that causes you to rethink your entire life—could happen. In these cases, you need to be prepared to walk away without the money.
Work With a Real Estate Agent
Get your ducks in a row! The best way to navigate the home-buying process is with the guidance of a trusted professional.