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There is a way you can prove a seller that you are serious about the offer and are ready to make an offer on the home. You can do this with earnest money. It is the money you put down to prove that you are serious about buying the home. This amount is also known as good faith deposit. 

Image of a house
Earnest money is the money you put down to prove that you are serious about the purchase.

Earnest money will protect the seller in case the buyer cancels the deal. An earnest money deposit may run from 1% to 3% of a property’s purchase price, according to the National Association of Realtors, but making a larger earnest money deposit can set you aside from other buyers. It is put aside in an escrow account until the closure of the deal. In case the deal closes, the earnest money will be considered as the buyer’s down payment. When the deal fails to close, this amount will be returned to the buyer. This money can reduce the chances of the buyer placing several offers for different homes and then changing their mind. 

What’s the “earnest money deposit” on a home purchase?

It is important to note that earned money is not a requirement, however, it can make it easier for you to purchase a property in the real estate market. Property owners like to work with those who are happy to put down the good faith deposit because it shows that the sale will not fall through. The money acts like insurance for the buyer and the seller in the deal. It is also possible to reduce the amount you need at closing since it is applied directly to the down payment.

How Much Earnest Money Do You Need?

The obvious next question is how much money should you put down in the house? The amount you should offer depends on the market the property is in. There is no hard and fast rule about the deposit. It varies from one housing market to the next and is based on multiple factors.

The level of activity in one market and the price range of the property in question will have an impact on the earnest money trend. Some agents say that 1% -2% is a rule of thumb in majority markets. Earnest money can be as low as $500 to $2,000, or between 1 to 5 percent of the purchase or it can be as high as 10 percent.

If you are looking for a property in the high-end market with many competitors fighting for the property, you may have to pay 2%-3% of the offer amount. The amount will vary based on the location and it is best to stick to the local norm to avoid losing the property to a buyer. Making a deposit that is below average for the area means they will not take you seriously. If your home’s sales price is $250,000, and you’ll borrow $237,500, your required down payment is $12,500 (5 percent)

The deposit will go toward the purchase price if the deal goes through. Hence, you will not lose it until you call off the deal. The purpose is to show the seller that you are sincere and genuine about purchasing the property. 

Is it possible to get back the money?

The earnest money has certain contingencies that protect the buyer and the seller in specific situations. At the time of making an offer, if the seller accepts it, the sale will only be finalized when the contingencies are met. They are usually mentioned in the purchase agreement and include an appraisal, mortgage approval, and inspection. 

Appraisal contingency

This contingency will protect the buyer in case of the overvaluation of a property. The lender will appoint a third-party appraiser in order to estimate the fair market value and to compare it to similar properties for sale purposes. Now, if the home is appraised less than the sale price, you may choose not to go ahead with the deal. In this case, you will get the money back. 

Mortgage approval

In case you were not preapproved for a mortgage and you also do not get approval but you have put the earnest money down, the mortgage contingency will protect you. It is possible to get your money back if the contingency was mentioned in the agreement. 

Home inspection 

A common reason a lot of buyers back off from a deal is the home inspection. When the home is inspected by a professional and there are some parts of the home that need repairs, a home inspection contingency will allow you to back out of the transaction and get the money back. 

Earnest money might seem like it is just another cost you need to cover. However, it is an extremely important cost and will protect you in case something goes wrong with the property. It will also protect the seller if the buyer walks out of the deal. It is an important element to consider when you look for homes. 

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