When making an offer on a home, you must come up with a lump sum of money, known as the “earnest money deposit,” to show the seller your offer is legitimate. After all, if you have nothing at stake, you can simply walk away from the deal if something doesn’t go your way, or if you simply experience a change of heart.
Once the seller accepts your offer and your real estate agreement is finalized, an earnest money deposit should be sent within 24 to 48 hours. This fee is held by a third party, typically an escrow company, until the deal is finalized. Your agent will tell you how to make the deposit, and wiring instructions from an escrow company will probably be sent your way.
How Much Should the Earnest Money Deposit Be?
The question is, how much is enough, and how much is too much?
The problem with buying a home is that complications can occur, and there may be a situation that prevents you from buying the home, such as difficulty obtaining financing, or another unrelated problem. If you lay down too big of a deposit, you could wind up losing a significant chunk of change.
At the same time, you don’t want to be too stingy with the earnest money deposit, as the seller may have multiple offers, and will likely consider a larger deposit indicative of a more qualified and serious candidate.
That said, many real estate professionals recommend coming up with an earnest money deposit of 3% of the purchase price, though as mentioned above, this can vary depending on demand and other conditions. But basically an earnest money deposit between 1-2% should be sufficient in most cases.
If it’s a short sale or a foreclosure, the process may take awhile, so putting down a slightly smaller deposit should be acceptable, seeing that the money could be tied up for months.
Regardless, speak with your agent to determine the appropriate size of the earnest money. If you’re the only bidder, you don’t need to go nuts laying down cash. But if competition is fierce, it may get expensive in a hurry.
Getting the Earnest Money Deposit Refunded
It’s also important to make an agreement regarding the refund of the earnest money deposit. After all, if something does go wrong, you’ll want to ensure you get all or most of your money back.
Typically, the buyer will get their deposit back in full if something goes wrong from the start, and is within the contingency period. For example, if you don’t like the home inspection, you can walk away and get your full deposit.
If problems occur late in the transaction, the deposit may be split somewhat between buyer and seller, with a portion of the deposit lost to cancellation fees. And if the buyer is at fault, the seller will typically keep the deposit as consolation for their wasted time and effort.
Make sure you hold on to the copy of the check (or bank wire) used for the earnest money deposit, as the bank or lender financing the deal will likely ask for a copy.
You may also need to source the funds as well, so be sure you have enough money in your bank accounts to cover closing costs, reserve requirements, and the down payment. If you are unable to come up with these funds, your mortgage application could be declined and you could lose your home and your earnest money deposit!