One important aspect of the home-buying process is earnest money. Earnest money is the money a buyer offers to have deposited at contract time to show he is earnest or serious about purchasing the home. Earnest money is sometimes referred to as a "good-faith" deposit. As home values have been rising, so have earnest money amounts.
How Earnest Money Works
When you submit an offer to purchase a home, part of the contract deals with earnest money. Your real estate agent will guide you on the amount of earnest money to offer that is typical or expected in your market. Once your offer is accepted and you have a fully executed contract, your earnest money check will be cashed and held in an escrow account. In some areas the title company will hold the earnest money. Sometimes, in states that use attorneys for real estate transactions, one of the attorneys in the transaction holds it. In some states the listing or buyer's brokerage will hold the earnest money in a separate escrow account. Regardless of how or where it's held, your earnest money is calculated as part of your down payment at closing.
How Earnest Money Varies from State to State
In an article on realtor.com written by Angela Colley, on May 19, 2022, The Earnest Money Deposit: How It Helps Buy a Home, "The amount you'll deposit as earnest money will depend on factors such as policies and limitations in your state, the current market, what your real estate agent recommends, and what the seller requires. On average, however, you can expect to hand over 1% to 2% of the total home purchase price." In today's hot markets, buyers are offering up more earnest money to get their contracts accepted. In the same article Colley states, "In markets where demand is high, the seller may ask for a higher deposit, perhaps as much as 2% to 3%." In another article on realtor.com written by Margaret Heidenry on April 10, 2022, "For a home buyer's offer to stand out, Robyn Porter, a Realtor in the Washington DC, metro area, tells her clients to include an EMD (earnest money deposit) in their offer that will get a seller's attention. Porter suggests earnest money of 4% to 5% of the purchase price." In other areas of the country, such as in Oklahoma, a flat fee of $500 has been a long-time considered common amount for earnest money. However, with the market being as hot as it has the past couple of years, a 1% earnest money deposit is becoming more the norm.
Is Earnest Money Guaranteed?
Earnest money is not a guarantee to the seller that you are going to purchase the home. For example, if you find major defects or safety hazards in the home that cannot be rectified, you are legally able to get out of the contract during the inspection contingency period. If there are any other contingencies in the contract that you cannot fulfill as a buyer, including your mortgage approval, you will be able to get your earnest money back in most cases.
What Happens to the Earnest Money if the Contract is Canceled?
There are a few scenarios for earnest money if the contract is canceled. If it is canceled due to a buyer not being able to fulfill a contingency in the contract, the buyer is protected and has a right to get the earnest money back. Most states do require a separate form to be signed by the seller and the buyer in order for the earnest money to be released back to the buyer. On occasion, if the buyer defaults on the contract for any reason that is not covered in a contingency in the contract, the seller is able to retain the earnest money for damages of having his home off the market for so long and for non-performance of the contract. If the buyer and seller cannot agree on the earnest money disbursement if the contract is canceled, sometimes they split the amount. On rare occasions, the earnest money remains in the escrow account until the parties go through legal avenues for its release.
With the sizzling hot seller's market of late and with home values continuing to rise, earnest money has become more and more important in real estate transactions. Be sure to ask your real estate agent what amount of earnest money is common and will help your offer stand out in your area.