Earnest money shows good faith. When you make an offer on a home, it is the deposit that tells the seller you are serious about buying. In this market, one to two percent of the purchase price is typical. It is refundable under the contingencies in your contract, and if the sale goes through, it is credited toward your costs at closing. Earnest money is one of the most common sources of questions from first-time and out-of-area buyers, so here is a clear look at how it works, what protects it, and how to handle it wisely.
What Earnest Money Is
Earnest money is a deposit a buyer makes after an offer is accepted. It is not an extra fee on top of the price. Instead, it is part of the money you will put toward the purchase, held by a neutral party until closing.
Sellers take their homes off the market when they accept an offer, sometimes turning away other buyers. Earnest money gives them some assurance that the buyer intends to follow through. For buyers, a solid earnest money deposit can also make an offer more competitive, especially when multiple buyers are interested in the same home.
How Much Is Typical
In this market, one to two percent of the purchase price is typical. The right amount for your offer depends on several factors:
- Competition. When a home is drawing a lot of interest, a stronger deposit can help your offer stand out.
- Price point. Higher-priced homes generally involve larger deposits in dollar terms.
- Local custom. Practices vary from market to market, and we will tell you what is customary for the property you are pursuing.
- Your comfort level. You should never deposit more than you are prepared to have tied up until closing.
We talk through the amount with every buyer before an offer is written so it fits both the market and your situation.
Who Holds the Money
Earnest money is not handed directly to the seller. It is typically held in an escrow or trust account by a neutral party, such as a real estate brokerage or a closing attorney, according to the terms of the contract. That party holds the funds until closing or until the money is released according to the contract.
The contract will specify how and when the deposit must be delivered. Missing that deadline can create problems, so make sure you know exactly when and how to deliver your funds. Always verify payment instructions directly with the escrow holder using a phone number you know is legitimate, since wire fraud schemes sometimes target real estate transactions.
When It Is Refundable
Earnest money is refundable under contingencies, which are conditions written into the contract that must be met for the sale to proceed. Common contingencies and protections include:
- Inspection or due diligence. Many contracts give buyers a set period to inspect the property and decide whether to proceed. In Georgia, many contracts use a due diligence period during which the buyer may be able to terminate according to the contract’s terms.
- Financing. If the buyer cannot obtain financing under the terms described, the contract may allow the buyer to terminate.
- Appraisal. If the home does not appraise at the contract price, an appraisal contingency may give the buyer options.
- Sale of another home. Some contracts are contingent on the buyer selling their current home.
- Title. Problems with the title may give the buyer the right to terminate.
The exact protections depend on how your contract is written. If a buyer terminates within the allowed terms, the earnest money is generally returned. If a buyer backs out outside those terms, the seller may be entitled to keep it. That is why it is so important to understand your deadlines and follow them carefully.
What Happens at Closing
When the sale closes, your earnest money is credited toward your down payment and closing costs. It shows up on your closing statement as a credit, reducing the amount you need to bring to closing. In other words, it is money you were going to spend on the purchase anyway; you have simply paid part of it earlier.
Common Mistakes to Avoid
- Missing contract deadlines. Notices and terminations usually must be delivered in writing by specific dates.
- Assuming every situation is refundable. Read your contingencies carefully and ask questions.
- Sending funds without verifying instructions. Always confirm wire or deposit instructions directly with the escrow holder.
- Offering more than you can afford to tie up. Keep enough cash for inspections, appraisals and closing costs.
- Forgetting about the due diligence or option terms. Some contracts include additional fees or terms that work differently from earnest money. Make sure you understand each payment in your contract.
Questions to Ask Before You Make an Offer
- What earnest money amount is typical for this property and price range?
- Who will hold the deposit, and how should I deliver it?
- What contingencies protect my deposit, and what are the deadlines?
- What happens to my deposit if the appraisal or financing falls through?
- How will the deposit appear on my closing statement?
Real estate contracts are legal documents. For specific legal questions about your contract or your rights, consult a real estate attorney.
Next steps
- Set aside funds for earnest money as part of your home-buying budget.
- Review the contract terms and deadlines with your agent before signing.
- Verify payment instructions directly with the escrow holder.
- Talk with Sherry about how much earnest money makes sense for the homes you are considering.
