How Much Earnest Money Deposit And When?

When real estate holdings transfer from a seller to a buyer, earnest money deposits get the ball rolling, they’re the good faith payment that says the purchaser means business. Earnest money deposits are typically 1% – 2% the sale value but can vary depending on the specifics of the home and region.

The law of contracts and the principle of caveat emptor govern real estate, which means be careful and don’t believe anything until you get it in writing. For sellers, that means you don’t do a deal until you’ve got a signed contract. You need to confirm that the buyer has deposited the earnest money into the appropriate escrow account.

Lenders And Sellers Understand Deposits Differently

Don’t confuse the earnest money with the deposit your bank wants you to put down. Your earnest money locks the seller into the sales contract. Although this payment contributes to your equity and therefore the full deposit, you’ll have to provide additional funds to fulfill the lender’s requirements when you close.

Banks typically expect buyers to provide a deposit a fixed percentage of the sale price depending on the type of mortgage being taken out. It may be possible reduce the deposit with a government-backed loan program such as an FHA loan. If you don’t have the equity, you can also purchase private mortgage insurance for the excessive portion of the loan.

Once you’ve ironed out out the details of the deal and signed the contract, you send a check or wire transfer to escrow for all or part of the agreed earnest money deposit. The amount you agree to put down depends on what was negotiated. If the seller has other offers, your realtor may advise you to provide a larger sum as earnest money than you would if no one else is bidding.

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Getting Your Funds Back When Agreements Fall Through

As the buyer, you are making a serious commitment and parting with funds when your realtor posts the deposit. Real estate transactions can be suspenseful, with the potential that even a simple deal can fall through.

Here are the three most likely outcomes when a deal doesn’t go through:

  • If the seller pulls out of the deal, then the buyer should to get the funds back
  • The purchaser changes their mind and cancel the transaction; they’re probably not getting the earnest money back
  • When it’s the lender that backs out the question is more complicated and may come down to timing
  • In any case, you should get advice from your Realtor

Only hand over the deposit when you are sure that you want the home and understand the risks. As with many other aspects of real estate sales, your individual state sets the laws that determine the finer details. Earnest money deposits are no exceptions how states regulate property transactions. Consult your realtor to confirm their personal approach and the process in your state.