What is Earnest Money?

So you’ve found your perfect house and want to make an offer. But how do you prove to the seller that your offer is serious? In a competitive real estate market, sellers tend to favor potential buyers who use a show of good faith that the deal won’t fall through.

This is where earnest money comes in.

Earnest money is a deposit a buyer puts down on a property as the house goes under contract to show how serious they are about buying the home. It acts as security for both the buyer and seller. The seller is protected because it shows that the buyer is serious about buying the house and won’t back out. Since earnest money is around 1%-5% of the listing price, it wouldn’t make a lot of sense for buyers to make earnest money offers on multiple houses. The earnest money is held in an escrow account until the deal is complete. When the transaction is complete, the earnest money is typically applied to the buyer’s down payment or closing costs.

Is earnest money required?

Earnest money is not required to buy a home. But in a competitive market where there are multiple offers on a home, earnest money shows the seller that the buyer is serious and less likely to back out. If you are unable to provide an all-cash offer, earnest money and in conjunction with as much down payment as possible is one of the best tools to use. Since it will be applied as part of the sale, earnest money acts as putting up money before the down payment.

How much earnest money should I put down?

It depends on the market, where the home is, and the popularity of the listing. Higher earnest money deposits are necessary in hot markets and/or popular areas like Boise. Vice versa for cooler or less popular markets. Typically, earnest money deposits are around 1%-5% of the listing price. Speak to your real estate agent about how much to put down. They will provide you with information and guidance about how much to put down. Listen to their advice.

Can you get your earnest money back?

The buyer is also protected with earnest money. If the deal falls through due to a failed home inspection or any other contingency listed in the contract, the buyer gets their money back. However, if the buyer backs out for a number of other reasons, the seller gets to keep the earnest money.

How to protect your earnest money

1. Use an escrow company to hold the funds until the sale is complete.
2. Know all of the contingencies for both parties.
3. Stay on track with all closing responsibilities.
4. Put it all in writing.

Are you ready to start your home-buying journey? Call our locally-based agents at (208) 974-5613 to get started.