What Is Earnest Money and How Much Should You Put Down?

By Felicia Oliver

Posted on September 2nd, 2022

What is earnest money? | How much is earnest money? | Who pays it? | Is it refundable? | FAQs

What is Earnest Money?

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When a buyer makes an offer on a house, they’re almost always required to put down an “earnest money” deposit.

On average, earnest money is 1-3% of the offer price. For the average U.S. home valued at just under $350,000, that comes to $3,500-$10,500.

But, in competitive markets where sellers have a lot of leverage, earnest money can run as high as 10%, or $35,000, for the average home. That’s a huge financial commitment — and one you probably won’t make unless you’re sure you want the house.

Earnest money is different from the down payment. Its purpose is to show the seller that the buyer is serious about the deal, and that it’s worth their time (and opportunity cost) to take their home off the market while the financing and closing processes play out. Think about it this way: if buyers didn’t have to put down earnest money, they could make offers on a bunch of houses, taking them off the market while they decided which one they prefer.

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What Is Earnest Money?

After the seller accepts the offer, the buyer puts down earnest money to show they’re committed to buying the home. Earnest money is sometimes called a “good faith deposit,” signifying that the buyer is proceeding in good faith regarding the purchase.

If the deal falls through, the buyer could lose their earnest money; if the deal is completed, the earnest money is applied to the buyer’s down payment at closing.

How Much Is Earnest Money?

Earnest money is typically 1-3% of the purchase price, although it can be as high as 10% in very competitive housing markets.

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In a high-demand seller’s market, sellers are more likely to ask for 3% (or more) as an earnest money deposit. In a cooler buyer’s market, sellers will usually settle for 1-2%. And some sellers may ask for a lump sum (for example, $10,000) as earnest money.

From the seller’s perspective, the more earnest money the buyer puts down, the stronger their commitment to the deal. But if the buyer is unable (or unwilling) to put down more than 1% in earnest money, the seller may wonder how serious they are about the sale, as well as their financial stability.

How Much Earnest Money Is Normal?

While 1-3% of the purchase price is normal for many home buyers, it's not always typical. Buyers with very low or 0% down loans — like FHA, VA or USDA loans — may not have any earnest money to spare. Since those offers come with contingencies, it would be unlikely for the seller to retain the earnest money deposit if the deal fell through anyway.

If you live in a neighborhood where cash buyers are common, you can expect earnest money. If you live in an area where lots of buyers utilize 0% down loans, you may not get any offers with an earnest money deposit.

Your realtor will know what earnest money amount is normal in your area.

Who Pays Earnest Money?

The buyer pays earnest money.

When the purchase agreement is signed, the buyer’s earnest money is put into escrow. At that time, the home is taken off the market, even though the sale hasn’t actually been finalized. The earnest money gives the seller some reassurance that their time isn’t being wasted, and that they’ll be compensated for their time if the buyer changes their mind and backs out of the deal.

If the home is inspected and appraised without finding any major issues, and all contingencies in the contract are satisfied, the deal closes and the earnest money is available to apply to the down payment at closing.

If the deal isn’t completed, what happens to the earnest money depends on why the deal fell apart. Usually, the buyer's contingency protects their money and the earnest money is returned. If no contingencies are in place and the deal falls through, the seller usually keeps the earnest money.

» MORE: When Is Earnest Money Refundable?

Is Earnest Money Refundable?

Yes, under certain circumstances, such as:

  • If the home appraises for less than the sale price
  • The buyer’s financing falls through at the last minute
  • The home inspection finds a serious issue with the property

In these circumstances, the buyer could back out of the deal and get their earnest money refunded IF there are appraisal/financing/inspection contingencies in the purchase agreement.

If the buyer waived their contingencies and then backs out of the deal— they likely won’t get their earnest money refunded. The same applies if the buyer doesn’t meet the terms and timelines laid out in the purchase agreement; they’ll likely lose the house and their earnest money.

But, if the seller backs out of the deal, the buyer’s earnest money is always refunded.

Questions about earnest money? An experienced real estate agent can help!

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FAQs

What is an earnest money deposit?

Earnest money is a good faith deposit that a homebuyer puts down when they sign the purchase contract. Learn more about earnest money deposits.

Is earnest money refundable?

Yes, in some circumstances. If the seller backs out of the deal, or there are appraisal/financing/inspection contingencies in the purchase agreement that aren't met, the earnest money is likely refundable. Learn more about when earnest money is refundable.

How much is earnest money?

Earnest money is typically 1-3% of the purchase price, but can be as high as 10% in very competitive housing markets. Learn more about how much you might pay in earnest money.

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Posted in Buying a House, Selling a House