So you’ve found the home you want to buy, and you’re ready to write an offer. During the offer writing process, your real estate agent will discuss what amount you want to put down for earnest money.
What is earnest money?
Earnest money is a good faith deposit that you give once your offer is accepted, to show the seller that you intend to follow through on the purchase and close. Typically, this money is due within two business days of the mutually signed contract. At closing, the amount deposited with be applied towards the cash you would owe for your down payment and closing costs. However, if you fail to close, it’s possible that the seller is able to keep this money as damages for you walking away.
How much earnest money should you give?
Honestly, you can offer as little or as much earnest money as you feel comfortable with – but what we usually see is somewhere around 2% to 3% of the purchase price. This varies a lot based on the purchase price itself – obviously 5% of $200,000 is a much different number than 5% of $2,000,000. We’ve seen earnest money amounts as low as $500 in a buyer’s market, up into the hundreds of thousands of dollars in a competitive seller’s market. There’s really no one set answer here, and your earnest money amount should fit in with your overall offer strategy. A good real estate agent will help you craft the right number that makes you feel comfortable and also gives the seller enough confidence to take your offer.
Earnest money is also a negotiable contract term – you may think you want to offer a certain amount, and the seller definitely has the right to counter-offer with a different, larger amount.
Where does your earnest money go?
Your earnest money will usually be due within two days of having a signed contract with a seller. There are two options for holding it – one is with your agent’s brokerage. We see this happen very rarely in the Seattle area, as a lot of brokerages don’t like to hold earnest money and a lot of sellers are not comfortable with the money being held by someone representing the buyer.
The more likely scenario is that your earnest money will be held by an escrow company, a neutral third party. This escrow company will also be helping to facilitate the closing process, so it’s natural that they would hold the money and distribute the funds correctly upon either closing or cancelling of the contract.
Can you get your earnest money back?
If you decide you no longer want to purchase the home, you may wonder if you get that earnest money back. The answer is yes or no, and this all depends on your contract. Your agent will have helped you write an offer that may or may not include contingencies that work in your favor. For instance, if a contract has an inspection contingency allowing you to have a private inspection, it’s common that upon finding results you’re not happy with you can cancel the contract and have the earnest money returned. There are also financing, appraisal, home sale, title review and more contingencies that you may or may not have in your specific contract. Most contingencies will have a time frame or deadline attached to them to perform by, so you want to be very aware of all deadlines – if you try to back out of a purchase based on the inspection but your inspection period is already over, you may lose that earnest money to the seller.
Why would the seller get to keep your money? That’s not fair.
If you do run into a case where the seller is able to keep your earnest money, it may not seem fair to you, but the truth is this is used as damages for the seller for their time wasted in having the home wrapped up under contract. You may have been in contract for three, four, or more weeks in which time the seller has likely been paying their mortgage and utility bills. On top of that, once a contract is cancelled, the seller has to spend the time and money to re-market the home to the public (who are now probably wary of why it was re-listed). They may have to re-stage it, drop their list price, or any other number of difficulties to get it sold again – so your earnest money can become the seller’s recovered damages.
How do you make sure you don't lose your earnest money?
The only sure way to not lose earnest money is to follow through on the contract and close on your home purchase. But along the way, your agent will you guide you into writing the best offer possible and following through with timelines and contingencies. Lean heavily on them - but always make sure to read the contract yourself and understand your own deadlines.