What is an Earnest Money Deposit?

If you are planning on buying a home this year, one of the more proactive steps you can take is to calculate out what cash you’ll need on hand for the home buying process so that you are not faced with surprise expenses down the line. You may also need cash on hand for after you purchase a house in order to move or to furnish your new home, but outside of your down payment, what cash might you need to spend in order to purchase a home? Many of the expenses and fees charged during the home buying process can be rolled into your mortgage, but one item that you’ll want to take into consideration is what’s called the earnest money deposit.

What is an earnest money deposit?

An earnest money deposit is an amount of money given by a prospective home buyer to the seller is order to show that you are serious about purchasing the home and are dealing with the seller in what’s known as good faith when it comes to purchasing their home. Earnest money deposits are generally submitted to the seller at the time you submit your offer. The deposit shows them that you have some funds available to purchase the home and allows you time to secure your financing/mortgage.

Earnest money deposits act as a bit of a barrier to buyers who are not serious or who file frivolous offers on homes. You won’t generally make your deposit to the seller themselves, but instead to an escrow company who will hold your money securely until the sale of the home is finalized.

How much does an earnest money deposit have to be?

There is no formal or legal requirement across-the-board that governs how much an earnest money deposit must be. It should be an amount that conveys to the seller you are serious (so, not as low as say, $100), but it doesn’t necessarily have to be tens of thousands of dollars either. Your real estate agent can help you to determine a figure that’s appropriate for your earnest money deposit, but you can expect it to generally be around 1% to 3% of the sale price of the home. If you are looking to purchase a $250,000 home, a deposit around $2,500 will be appropriate. 

What if the deal doesn’t go through? Will I get my money back?

Generally, yes.  When you enter into a real estate contract, the contract will spell out what will happen to the earnest money deposit should the deal not go through as planned. If you pull out of the deal for a reason not allowed by the real estate contract, you may not be entitled to receive your earnest money deposit back, and the deposit will act as compensation to the seller who now has to list their home on the market again. But, if you pull out of the home buying process for a reason covered and allowed by the real estate contract – generally something like refusing to remove a “clear inspection” contingency you submitted with your offer after an inspection shows that the home has serious foundational issues, you will be entitled to receive your money back.