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What is earnest money, when do I need it, and how much? [Video]

Tim Lucas
The Mortgage Reports editor

What is earnest money?

Earnest money is the buyer’s way of saying “I’m serious about buying this house.”

The old saying “Put your money where your mouth is” really describes what earnest money is all about.

It’s a big commitment for a seller to accept an offer. If the buyer backs out, the seller loses thousands of dollars while finding another buyer.

That’s why sellers require earnest money.

Earnest money is a regular check, cashier’s check, or wire from the buyer. It doesn’t go to the seller right away. Instead, it gets deposited with the escrow company.

An escrow company is simply a third party that holds all money involved in the transaction until the sale is complete.

The seller considers earnest money “received” when it gets word that funds are deposited with the escrow company.

Start your home search by requesting a pre-approval here. (Aug 21st, 2019)

When do I need earnest money?

You will need to hand over the earnest money check to escrow within one to two days of the seller accepting your offer.

That’s why it’s good to have liquid funds available when you make an offer.

You don’t want to submit an offer, then realize you need a week to sell stocks, borrow from your 401k, or get a gift from a relative.

How much earnest money do I need?

The amount varies greatly based on a buyer’s or seller’s market, the home price, area, and how many offers you expect the home to get.

As you might guess, hotter markets and more desirable areas will require higher earnest money amounts.

In low-cost areas with little competition, earnest money checks of $500-$1,000 are not unheard of.

But for the most part, earnest money is between 2% and 7% of the home price.

Is earnest money applied to my down payment and closing costs?

Yes. Your earnest money does not just “go away.” Rather, it is applied to costs you would have already had at the end of the transaction, like closing costs and/or down payment.

Can I get the earnest money back if the sale doesn’t go through?

Sometimes. It depends on why it didn’t go through.

If you placed the right contingencies (stipulations or conditions) in the contract, and the home or seller didn’t meet those agreements, you can get your earnest money back.

For instance, say you agreed that the home would appraise for the sale price, but it comes in lower. You can back out of the deal and get your earnest money back.

But if you just don’t feel like buying the house anymore, really for no valid reason, then the seller has the right to keep your earnest money in some cases.

Before you submit earnest money, make sure you are serious about buying the home.

How do I get approved to make an offer on a house?

If you’re ready to take the step in buying a home, you’ll need a pre-approval. You’ll need this piece of paper to view homes and make an offer.

Get a pre-approval — often in a matter of hours — by connecting with our pre-screened lenders, some of the best in the industry.

Start your mortgage pre-approval request here. (Aug 21st, 2019)

 

Check out our first article in this series: “What’s the first step to buying a home?”

 

 

 

 

Verify your new rate (Aug 21st, 2019)