Protect Your Investment: The Role of Earnest Money in Homebuying

By Katie Murray on June, 7 2024
Back to main Blog
Katie Murray

Looking for your dream home is an exciting adventure, but there’s one important term to know before putting in an offer on your new home: earnest money.

Earnest money, often called a "good faith" deposit, is a crucial part of the homebuying process. But what exactly is earnest money, and why does it matter? Let's dive into the essentials and unpack what it entails for prospective homebuyers like you.

What is Earnest Money?

Essentially, earnest money is a deposit made by the buyer to the seller to show them you're committed to the deal. When you submit earnest money, you're taking the first step toward securing your dream home. It initiates a contract between you and the seller, prompting them to take the property off the market while you proceed with inspections, appraisals, and securing financing.

The Significance of Earnest Money

Now, here's the important part: the amount of earnest money you offer can speak volumes about your commitment to the seller. A higher deposit often gives you a more competitive edge over other buyers.

How Much Earnest Money is Required?

The amount of earnest money can vary but typically falls between 1% to 10% of the home's purchase price. In competitive markets with high demand and low inventory, you might find yourself needing to offer a higher amount to stand out among other buyers. However, you and the seller can negotiate, giving you some flexibility in the process.

Protecting Your Earnest Money

Here’s the kicker about your deposit: if you back out of the deal or do not fulfill the terms in your contract, the seller gets to keep your deposit.

To safeguard your earnest money as a buyer:

  • Ensure your purchase agreement includes contingencies for financing and inspections.
  • Get all contract terms in writing, including earnest money details.
  • Familiarize yourself with and follow the contract terms.
  • Deposit your earnest money into an escrow account held by a reputable third party.
  • Make the deposit payable to a trustworthy entity such as a real estate brokerage or escrow company. Never make a direct payment to the seller.

In essence, earnest money is your first step toward homeownership, signaling your intent to purchase while protecting your interests as a homebuyer. By understanding its role and taking the necessary precautions, you can confidently navigate the homebuying journey.

Before buying a home, always talk to your realtor or lending professional about contract terms to protect your deposit.