What is Earnest Money?

In this installment of Ask an Agent, findwell real estate agent Lauren Skow answers home buyer questions about earnest money. What is it, how much is enough, and what can home buyers do to protect it during their transaction.

Q: What is earnest money?

A: Earnest money is a deposit that the buyer puts down when they make an offer on a home. It shows their good faith in purchasing the property and their intent to move forward with the contract.

There are several contingencies that we put in place to protect your earnest money, so that if you do need to back out of the contract for some reason, you have the ability to do so and keep your earnest money. If you were to back out of the contract without using a contingency or for some reason not specified in the contract, you would forfeit your earnest money to the seller.

Q: Is there a standard amount of earnest money that I need to deposit?

A: There is no standard amount of earnest money that you have to put down. If you are in a multiple offer situation, stronger earnest money always makes your offer a little bit more attractive. However, there is no amount that you have to put forth.

Usually we like to see around 1% (of the sale price) or more. Putting too little of earnest money down can make you look like less of a serious buyer.

Q: My realtor told me that 3% earnest money is standard. Is that true?

A: 3% is definitely a good earnest money deposit, but it is not always necessary to put down that much. It can also depend on the purchase price of the home that you are looking at as well. If it is a lower-priced home, sometimes 1% may not be quite enough, but there is no rule that says you have to put 3% down.

Q: What if I have to back out of the deal? How can I protect my earnest money?

A: We put several contingencies into the contract, contingencies like and inspection contingency, which allows you to have a home inspected and back out of the contract if you are unsatisfied for any reason. In that case, you would get your earnest money back. We put a financing contingency in place for you, so if you couldn’t get a loan on the property, you can back out and get your earnest money back. There are several contingencies we can use to protect you throughout the process. However, if you back out not using a contingency or for no reason at all, once all of your contingencies have been satisfied, then you would stand to lose your earnest money to the seller.