What Is A Typical Earnest Money Deposit?

A lot of questions come up regarding earnest money. It is a good thing to be asking questions about this. Earnest money is what you stand to lose if you back out of the transaction for a reason not covered by a contingency in the purchase agreement.

This post will give you an education about earnest money. I’ll also answer some of the most common questions when it comes to earnest money.

What Is Earnest Money?

Earnest money is basically a deposit you make on a home. Once your offer is accepted you deliver the earnest money. The purpose of the earnest money is for you to put some skin in the game. The seller’s agent will be required to change the status of the seller’s home after accepting your offer. This will cause interest from other buyers to dramatically drop. Therefore, in case you decide to just change your mind or abandon the transaction for some reason not covered by a contingency, the seller can be compensated for the assumed missed opportunities of selling to another buyer.

Who Gets The Earnest Money?

Let’s be clear about that question. There are two parts. First, who the deposit is made to. The second is who gets the money in the end. The answer to this depends on how the transaction ends.

Initially, earnest money is almost always left with the brokerage company who has listed the property for sale. It is held in a trust account separate from the brokerage company’s general operating account. If there is no brokerage company, such as in the case of a For Sale By Owner, ask the title company who will be closing the transaction to hold the earnest money. Do not give it to the seller.

If the transaction closes, the earnest money will be applied as a credit to the buyer. This means somewhere in all of the cash to close (down payment, closing costs, fees, etc.) charged to the buyer. The earnest money is not a bonus to the seller.

If the transaction does not close the earnest money is either returned to the buyer or forfeited to the seller. It is returned to the buyer if the transaction fails for a reason covered by a contingency the buyer included in his or her offer. Earnest money is forfeited to the seller if the buyer fails to complete the transaction for a reason not covered by a contingency in the purchase agreement.

What Is A Reasonable Deposit On A House?

You might be asking: “What is standard deposit on a house?” There is no required amount nor is there a set earnest money percentage amount. However, in the markets where Quadwalls.com operates, we most commonly see 1% of the purchase price, usually rounded down to the closest $500 increment.

For example, if a client of mine was listing her house at $219,900 I would recommend asking for $2,000 in earnest money. 1% would be $2,199 which is just weird, so round down to $2,000 to keep things easy.

As for a buyer, I strongly encourage my buyers to offer 1% of the purchase price or less. I always encourage my buyers to try getting away with offering as little as possible. Remember, earnest money is that “skin in the game.” I want my buyers to put as little skin in as possible.

Also, even with higher priced homes, I encourage my buyers to keep earnest money always under $3,000. When earnest money gets too high, we start to see sellers make unreasonable and irrational decisions once the transaction does start to have problems. In my markets, $3,000 is a good stop gap.

Conclusion

There is no hard and fast rule for the standard earnest money deposit on a house. However, in many markets 1% is a typical earnest money percentage. Again, always try to put in as little as possible. Don’t try to get by with $0 or $500 though. If you are too far apart from what the seller wanted it will be a red flag making the seller concerned and doubtful of accepting your offer.

If you have more questions and would like assistance with making the best decisions when buying or selling real estate, feel free to contact one of our Quadwalls Connected Agents. We are here and ready to help you. Also, feel free to start searching for homes on our website.