What home buyers should know about earnest money

The housing market in this area certainly has its ups and downs, but when you find a home that’s right for you and your offer is accepted, you don’t want to risk losing it. However, a lot can happen between the signing of the purchase agreement and closing on the home. 

That’s why earnest money is becoming a regular part of the home purchase deal. It’s essentially a deposit made by the buyer to show that they’re serious about the purchase. It lets the seller feel more comfortable about not continuing to entertain offers, but it can also help the buyer feel more secure. (A buyer may opt to put earnest money down on more than one home until they decide which they want. However, most people can’t afford to do that.)

Earnest money is applied to the down payment and closing costs, so it’s not additional money. It just needs to be paid earlier in the process. It’s typically held in an escrow account, so neither party has access to it until the deal closes.

How much earnest money do you need to put down?

This can vary, depending on what state and even what area of the state you’re in. In this area, buyers typically make two earnest money payments. The first payment is usually deposited within a business day of signing the purchase agreement. It can be around $1,000 for a property valued at under $1 million but ten times that for a home valued at over $1 million. 

The second payment is generally made after the inspection and any changes to the agreement – usually about two weeks after the first payment. It’s usually about 5% to 10% of the purchase price, depending on whether the home is under or over $1 million.

Is earnest money refundable?

Typically, buyers can get their earnest money back if any of the contingencies listed in the purchase agreement aren’t met (for example, if the inspection turns up a serious issue, the appraisal doesn’t match the asking price or if the buyer’s financing falls through). 

This is just one reason why it’s wise to have experienced legal guidance as you negotiate and review your purchase agreement and other contracts during the home-buying process. This can save you from unnecessary and costly mistakes.