What is an Earnest Money Deposit?

What is an Earnest Money Deposit?

An Earnest Money Deposit is a sum of money that a homebuyer puts down to show they’re serious about purchasing a property. Think of it as a “good faith” gesture: you’re telling the seller, “I’m committed to this deal.” The deposit is typically held in escrow (by a third party) until the sale is finalized. If everything goes smoothly, the money is usually applied toward your down payment or closing costs.

If you back out of the deal for a reason not covered in your contract, you could lose your deposit. But if the sale falls through due to issues like a failed inspection or financing problems (and your contract allows for these contingencies), you usually get your money back.

How Much Should the Earnest Money Deposit Be?

The amount varies depending on the market and local customs, but here’s a general idea:

• Percentage of Purchase Price: Most buyers put down about 1% to 3% of the home’s purchase price. For a $400,000 home, that’s $4,000 to $12,000.

• Hot Markets: In competitive areas, you might see deposits as high as 5% or more to stand out among other buyers.

• Fixed Amounts: Some regions use set amounts (like $1,000 or $5,000) regardless of the home’s price, especially for lower-priced properties.

It’s always a good idea to talk to your real estate agent about what’s typical in your area. They’ll help you strike the right balance—enough to show you’re serious, but not so much that you’re overextended.

In short, the Earnest Money Deposit is your way of putting some skin in the game. It helps build trust with the seller and keeps the transaction moving forward. If you have more questions about the home buying process, feel free to ask!