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How Much Earnest Money Should You Put Down When Buying a House?

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When you are buying a house, one of the first decisions you will make is how much earnest money to put down. This is a security deposit that shows the seller that you are serious about purchasing the property. In this blog post, we will discuss the factors that go into deciding how much earnest money to put down when buying a house.

What is earnest money?

Earnest money is a deposit given to a seller to show that you are serious about buying the property. The amount of earnest money can vary, but it is typically around 1-3% of the purchase price.

What happens to earnest money when the property closes?

In most cases the earnest money deposit is converted to covering closing costs and your downpayment.

When do I need to deposit earnest money?

Most contracts state that the earnest money needs to be deposited within 1-3 days after acceptance of contract. In the event that earnest money is not deposited, the seller may issue a CURE notice or something similar letting you know that the deposit is due or the contract may be cancellable.

How much earnest money do I need to put down?

Averages are around 1-3% of the purchase price.

Here are some factors to consider when deciding how much earnest money to put down.

How serious are you about buying the property?

If you are serious and there is a lot of competition for the property, you may want to put down a higher earnest money deposit.

Is there a lot of competition?

Sellers are looking for buyers who are committed and who are going to close. More earnest money means you have more skin in the game.

Can you afford to lose the deposit?

If you are not 100% sure that you want to buy the property, it might be wise to put less money down as a security deposit. If for some reason you back out of the deal after putting a large earnest money deposit down, the seller may be able to keep your security deposit.

How much competition is there for the property?

If there are multiple offers on a house and you really want it, you should consider putting more earnest money down so that your offer stands out.

How do I put Earnest Money Down?

You can put down earnest money in a number of ways, including cash, check, or wire transfer.

Who do I pay that earnest money to?

In most markets, the earnest money is paid to a title and escrow company to be held in earnest throughout the transaction. In some cases, the earnest money may be paid to an attorney and others to a real estate broker. For specific details, reference your local real estate purchase contract for details.

If I am serious about buying the house, should I just make the earnest money non-refundable so the seller gets it no matter what?

This is an option. Just know that in any event that money is not coming back. We have even seen clients release the money to the sellers before it closes just to show that they are committed. Remember, never risk more than you are willing to lose in a deal. Sometimes these negotiations can get very aggressive. It is important to know your limits before you starting negotiating so you don’t over compensate and place yourself in a negative negotiation position.

When should I put less earnest money down?

- Is there a chance that you could back out of the purchase?

- How much money can you afford to lose if the deal falls through?

- Are there any other offers on the property?

- How serious are you about buying the house?

If you answer "no" to any of these questions, it might be a good idea to put less money down as your earnest money

Often times people get nervous about losing earnest money but in all reality, if you follow the contract and conduct your inspections during the right time, the earnest money is pretty much safe the entire transaction. It is really meant to show both parties that you are committed to closing the deal.

When could the earnest money be refundable?

  • During the inspection process
  • In the event of a financing decline during the financing contingency
  • In any event of a seller breach of contract
  • In the event if the property does not appraise and you cannot come to an agreement with the seller on a new price or terms (Assuming this was not waived in the contract negotiations)

When could the earnest money be non refundable?

  • If the buyer just has cold feet out side of the contingency timeframes
  • If the buyer doesn’t have the downpayment needed to close
  • If the buyer misses the closing date and doesn’t close

There are times when the earnest money does not have strict black and white rules. That is what it is help with a neutral third party to decide when and who it is refundable to.

If you have any questions around what happens to earnest money, the first place you should go would be to read the real estate contract line by line. Title and Escrow are instructed to follow the contract and not the options of the agents nor the parties to the contract.

 

 

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