Earnest Money: Defined & Explained

By Home Bay

Posted on October 24th, 2014

When you purchased your home, you most likely were asked to put down earnest money after your offer was accepted. But do you know what it's for and do you understand how the amount requested is calculated? This post will answer those questions!

Earnest Money: Defined & Explained

Earnest Money - Defined:

After a seller accepts an offer, an earnest money deposit (also known as a good faith deposit) is paid into escrow by the buyer. The earnest money deposit is typically 1 to 3% of the purchase price and is applied to the buyer's downpayment at the close of escrow.

How Much Earnest Money Should You Require?

Most sellers prefer the buyer to put down 2-3% of the purchase price as earnest money when demand is high (a "seller's market"). When demand is low and it's considered a buyer's market, it's common for sellers to accept 1-2%.

From the seller's perspective, the closer you can get to 3% - the better. Buyers can lose their deposit under certain circumstances, so committing to a higher earnest money deposit shows the seller that the buyer is serious and is more likely to close the deal.

If the buyer cannot deposit at least 2% of the purchase price as earnest money, sellers should ask hard questions of the buyer's financial wherewithal ahead of time to ensure they feel confident accepting the buyer's offer. For example, sellers may want to ask to see the buyer's credit score, bank statements, and any relevant accounts to show the buyer can afford the down payment and appears likely to receive a loan.

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