What is Earnest Money and How Much Of It Do You Need?

Throughout the home buying process, you may come across terminology you’re unfamiliar with. Earnest money (also known as an escrow deposit or good faith money) is perhaps one of those terms.

What is earnest money?

Earnest money is an amount of money that the buyer pays to the seller to, essentially, “reserve” the house. As a buyer, you may be certain you want to buy a home but still need to do an appraisal, inspection, title search, etc. Earnest money is like saying, “I am ready to buy this home if my contingencies are met.”

During this “limbo” period of time, the seller will take the home off the market and the house won’t be advertised or shown to other prospective buyers. Earnest money will be deposited into an escrow account and, once the inspection and such is complete, the earnest money will be counted towards your (the buyer’s) closing costs and down payment.

What is Earnest Money and How Much Of It Do You Need?

How much earnest money do I need?

How much earnest money you need depends on a couple of factors:

    • Popularity of the home
    • Market (cold or hot?)
    • Interest of other buyers
    • Local market rates

As a buyer, you may be able to negotiate the earnest money deposit with the seller or you may not. Sometimes it’s a fixed amount, but generally, the earnest money deposit is a percentage of the property’s sale price ranging from 1% to 10%. The exact percentage depends on the factors above, particularly how hot the housing market is. If the market is hot, you have to understand that you’re competing with other highly interest buyers who may be ready to close the deal sooner than you are. If this is the case, you may have to offer a higher amount of interest money, just to prove how much more interested you are than other buyers.

Earnest money can be tricky if you’re unsure how it works, but it’s a valuable tool for homebuyers to familiarize themselves with. For more information about earnest money, talk to your real estate agent. They can answer any questions you have as well as help you take the necessary precautions to protect your earnest money.