Earnest money is a term you’ll likely hear thrown around in most real estate transactions, but if buying or selling a home is new to you, then the term may sound more foreign than it should. In reality, earnest money is a normal part of the real estate process and is, in a way, a sort of guarantee that a buyer is serious about purchasing a home, therefore, reducing the seller’s risk in taking a house off the market.
Earnest money may sound a little daunting, but as a standard part of the buying and selling process, it’s nothing to worry about. Here’s our guide for what you need to know about earnest money.
What is Earnest Money
Earnest money, for lack of a better way of putting it, is a sort of downpayment or guarantee from a prospective buyer to a seller. Earnest money gives the seller some sort of assurance for both the buyer’s intent on purchasing the home as well as the safety of taking a listing off of the market. In the event that a buyer backs out of a contract, then the seller is entitled to the earnest money the buyer has committed.
Typically, buyers put forth earnest money as part of the initial offering process and can actually make an offer more attractive. For example, two buyers submitting competitive offers for the same home can be differentiated by the earnest money they’re willing to put down. The more earnest money down, the more intent a buyer is on purchasing the home and the more serious they are.
How Much Earnest Money Should You Offer?
Generally, somewhere between 1% and 3% of the home’s selling price is an acceptable amount of earnest money for an offer. This isn’t a hard and fast rule, but it’s a good guideline if you’re looking at offering earnest money as part of your offer package. In markets where inventories are short, expect to offer more earnest money than in buyer’s markets.
To better understand what is an acceptable amount of earnest money, it’s best to enlist the help of your real estate agent. Local agents generally have inside tracks on their own markets and can help guide you throughout the process including the offer. Additionally, your agent may personally know a seller or the seller’s agent and give you more inside information.
Is Earnest Money Required?
Simply put, no earnest money isn’t required to purchase a home, but in a seller’s market where multiple buyers are vying for the same home, it is all but a necessity. In competitive markets, not offering earnest money is likely a snub to the seller and delegitimizes your offer as a competitive one.
If you choose to include earnest money as part of your offer, the money itself is likely held in escrow through the title company. By holding earnest money in escrow, it is kept safe and can easily be transferred if your offer is accepted and the transaction goes through. From there, the money can be used towards your closing costs or down payment for the home to your lender.
Knowing What You Can Afford
Earnest money can be considered similar to your downpayment in the sense that its money you likely have saved already for that explicit purpose. However, there is some inherent risk in putting earnest money into a home with the very real risk that it could be lost if you choose to walk away or not fulfill your contractual obligation to purchase the home.
For this reason, it’s a good idea to know what you can afford before you make an offer or put down any earnest money. Tidewater Mortgage Services, Inc. can help you get pre-qualified and help make sure you’ve got your ducks in a row for your new home purchase!
