Everything You Need To Learn About Earnest Money

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You're not alone if you're confused by real estate jargon. Technical terms like earnest money, option fee, down payment, escrow, and closing may feel intimidating to the first-time home buyer.

Learning these terms helps avoid misunderstandings during the home purchase agreement. What follows here is everything you need to know about earnest money and an earnest money deposit.

What Is Earnest Money?

Earnest money is used while buying and selling a house. It is the sum of money the buyer deposits to get into a purchase agreement with the seller. It is also called a “good faith deposit.”

What Role Does Earnest Money Play?

Earnest money essentially works as an assurance to the seller for his consideration of the buyer's offer. It demonstrates the buyer is serious about following through with the deal and shows they are a strong candidate for buying the home.

Is Earnest Money Required?

Technically, you can get into the purchase contract without issuing earnest money. Also, it is not a requirement to get into a purchase agreement to buy a house.

However, you'll be in default if you don't deposit the earnest money within the time frame specified in the contract. In such cases, the seller can terminate the agreement.

How Much Earnest Money Should You Put Down? 

There is no set rule for the earnest money amount. The amount is highly negotiable, and often depends on whether it is a buyer's market or a seller's market at the time. Typically, it's about 1% to 3% of the sale price.

Does Earnest Money Go Towards Down Payment?

The earnest money goes to the down payment and closing cost when the deal goes through. The money stays at escrow or title company until the closing date. Therefore, you can assume it is part of the down payment.

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