Earnest money shows the other party that you are serious about buying a property (real estate mostly). It’s a percentage of the sale price, and it’s non-refundable if the deal falls through.
Earnest money is usually between 1%-5% of the purchase price but can be higher if you’re buying a more expensive property.
How much earnest money should I put down?
The amount of earnest money you’ll need to put down will depend on the purchase price, down payment and seller’s situation. You should also consider your own financial situation.
- The higher the purchase price, the more earnest money you’ll need to make a successful bid.
- The higher your down payment is compared to other buyers who are interested in buying this house, the more likely they will accept it as an earnest deposit.
What happens to earnest money when a deal falls through?
In most cases, earnest money deposits are nonrefundable—regardless of whether or not you move forward with your purchase. If things don’t work out between you and your potential seller, they’ll keep the deposit.
There are some exceptions to this rule: if the house falls through because it failed inspection or had structural issues (or other major problems), then it’s possible that some or all of your deposit could be returned to you.
What is Earnest Money used for?
It can help with the closing costs and down payment, depending on how much you put down. The seller may agree to use the earnest money as part of their down payment.
Earnest money vs Down payment
Down payment is the amount of money that you will pay at the time of closing and it is usually 5-10% of the purchase price. Earnest money is the first part of a down payment. It’s paid at the start of negotiations.
Down payments are usually much higher than earnest money. Both are meant to show a sign of good faith from you and can help offset any costs associated with holding on to a property for a period of time before selling or renting it.
Due diligence
Due diligence is an inspection performed by an independent third party on behalf of the buyer or seller (or both). The purpose of due diligence is for one party or both parties together to ensure that they are buying/selling something that they understand fully before closing on the transaction itself.
Key Points
- Earnest money is a deposit used in real estate transactions to show good faith on the part of a buyer. If you’re buying a home, your earnest money will be used as part of your down payment.
- The amount of earnest money that should be paid varies based on the area where you’re living, but it usually falls somewhere between 1% and 5% of the purchase price.
- The higher end of that range tends to apply if you’re buying in an area where home prices are high or if there is an especially competitive housing market.
- Earnest money deposits are often forfeited if one party backs out before closing—which can happen for any reason.
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