{"id":47928,"date":"2021-02-04T06:45:36","date_gmt":"2021-02-04T14:45:36","guid":{"rendered":"https:\/\/www.credible.com\/blog\/?p=47928"},"modified":"2023-02-09T08:07:15","modified_gmt":"2023-02-09T16:07:15","slug":"how-earnest-money-works-and-how-much-youll-need","status":"publish","type":"post","link":"https:\/\/www.credible.com\/blog\/mortgages\/earnest-money\/","title":{"rendered":"How Earnest Money Works \u2014 And How Much You\u2019ll Need"},"content":{"rendered":"<p>Earnest money is a deposit you make to show that you\u2019re serious about buying a home.<\/p>\n<p>To protect your earnest money deposit, you\u2019ll want to include certain contingencies in your purchase agreement \u2014 such as contingencies for financing and a home inspection.<\/p>\n<p>Once the purchase agreement has been signed, the seller\u2019s real estate agent will place the earnest money in an escrow account until closing.<\/p>\n<p><b>Here\u2019s what else you need to know about earnest money: <\/b><\/p>\n<ul>\n<li><a href=\"#what-earnest-money\">What is earnest money?<\/a><\/li>\n<li><a href=\"#how-much-money-down\">How much earnest money to put down<\/a><\/li>\n<li><a href=\"#earnest-money-deposit\">What happens to your earnest money deposit<\/a><\/li>\n<li><a href=\"#contingencies-earnest-money\">How contingencies protect your earnest money<\/a><\/li>\n<\/ul>\n<p><a name=\"what-earnest-money\"><\/a><\/p>\n<h2>What is earnest money?<\/h2>\n<p>Pledging earnest money with your purchase offer is not a legal requirement to <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/how-to-buy-a-house\/\">buy a home<\/a>, but it is standard practice. It shows the seller that you intend to go through with the purchase as long as there\u2019s nothing seriously wrong with the house.<\/p>\n<p>Without an earnest money deposit, buyers could easily make offers on multiple properties since they\u2019d have nothing to lose by backing out of the deal.<\/p>\n<p>But this would put a lot of sellers in a tough position, and the real estate market wouldn\u2019t function as smoothly.<\/p>\n<div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\"><b>Know the difference: <\/b>Earnest money is not the same thing as a <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/how-much-down-payment\/\">down payment<\/a>. Both give you skin in the game, but earnest money shows the seller that you\u2019re serious about the purchase, whereas a down payment shows the lender you\u2019re serious about the purchase.<\/p>\n<p>That said, you can usually apply your earnest money deposit toward your down payment, so you don\u2019t have to worry about saving up enough money for both.<\/div><\/div>\n<p>Finding a great mortgage rate can help save you thousands of dollars over the course of your loan. With Credible, you can compare all of our partner lenders in as little as three minutes.<\/p>\n<p><div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\"><\/p>\n<h3><span style=\"font-size: x-large;\"><strong>Credible makes finding a mortgage easy<\/strong><\/span><\/h3>\n<h6 class=\"accent--isGrayLight\">Compare prequalified mortgage rates from top lenders in just 3 minutes.<\/h6>\n<ul class=\"list--iconArrow accent--isGreen list--iconCheckmarkSolidCircle\">\n<li>Personalized rates, not generic<\/li>\n<li>One simple, safe TLS-encrypted form<\/li>\n<li>No spam calls from lenders<\/li>\n<li>Checking rates is free, with no commitment<\/li>\n<\/ul>\n<p style=\"text-align: center;\"><a class=\"btn btn-warning\" href=\"https:\/\/www.credible.com\/mortgage\/form\/property-stage?utm_source=wp-credible&amp;utm_medium=mp-box-cta&amp;utm_campaign=seo\" target=\"_blank\" rel=\"noopener\">Find My Rate<\/a><br \/>\n<!-- TrustBox widget - Micro Combo --><\/p>\n<div class=\"trustpilot-widget\" data-locale=\"en-US\" data-template-id=\"5419b6ffb0d04a076446a9af\" data-businessunit-id=\"5536ec090000ff00057eebe7\" data-style-height=\"20px\" data-style-width=\"100%\" data-theme=\"light\"><a href=\"https:\/\/www.trustpilot.com\/review\/www.credible.com\" target=\"_blank\" rel=\"noopener noreferrer\">Trustpilot<\/a><\/div>\n<p><!-- End TrustBox widget --><\/p>\n<p><\/div><\/div><\/p>\n\n<a name=\"how-much-money-down\"><\/a><\/p>\n<h2>How much earnest money to put down<\/h2>\n<p>A typical earnest money deposit is 1% to 3% of the purchase price. For new construction, the seller might ask for 10%.<\/p>\n<p>So, if you\u2019re looking to purchase a <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/250000-mortgage\/\">$250,000 home<\/a>, you can expect to put down anywhere from $2,500 to $25,000 in earnest money.<\/p>\n<p>Several factors affect how much earnest money you\u2019ll need to deposit:<\/p>\n<ul>\n<li><b>Demand:<\/b> In a strong seller\u2019s market, a large earnest money deposit can help make your offer stand out.<\/li>\n<li><b>Local customs:<\/b> Ask your real estate agent what a typical earnest money deposit is in your area.<\/li>\n<li><b>What the seller will accept:<\/b> If the seller doesn\u2019t think your earnest money deposit is high enough to show you\u2019re serious, they might not accept your offer. Consider what amount of good faith money would convince them to stop accepting offers from other buyers.<\/li>\n<\/ul>\n<p><b><i>Learn More: <\/i><\/b><a href=\"https:\/\/www.credible.com\/blog\/mortgages\/how-to-get-a-mortgage\/\"><b><i>How to Get a Mortgage (Home Loan)<\/i><\/b><\/a><br \/>\n<a name=\"earnest-money-deposit\"><\/a><\/p>\n<h2>What happens to your earnest money deposit<\/h2>\n<p>The seller\u2019s real estate broker or agent will deposit your money into an <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/what-is-escrow\/\">escrow account<\/a>. This means that neither you nor the seller can touch the money until certain conditions are met, which are spelled out in the purchase agreement.<\/p>\n<p>Placing the money in escrow ensures that the seller gets the money if the buyer doesn\u2019t hold up their end of the contract, and vice versa.<\/p>\n<h3>If the sale goes smoothly<\/h3>\n<p>If the home sale proceeds as expected, your earnest money deposit will help cover your down payment and <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/mortgage-closing-costs\/\">closing costs<\/a>.<\/p>\n<h3>If the sale falls through<\/h3>\n<p>A sale could fall through for many reasons. In some cases, you can lose your earnest money deposit:<\/p>\n<ul>\n<li><b>You get cold feet. <\/b>If you decide to walk away from the home \u2014 whether it\u2019s because you\u2019ve found something better, decided it wasn\u2019t a right fit, or had a sudden change in circumstances (e.g., you lost your job or came down with an illness) \u2014 the seller is entitled to keep your deposit.<\/li>\n<li><b>You provide a nonrefundable deposit.<\/b> In a highly competitive market, you might offer a nonrefundable earnest money deposit to strengthen your offer \u2014 a major risk if you don\u2019t have money to burn.<\/li>\n<li><b>A problem arises after a contingency deadline.<\/b> To protect yourself, you\u2019ll want to include contingencies in the sales contract that give you time to order an inspection, get a <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/home-appraisal\/\">home appraisal<\/a>, and secure your financing. You\u2019ll waive each contingency after the deadline passes \u2014 and you won\u2019t be entitled to an earnest money refund then.<\/li>\n<\/ul>\n<p><a name=\"contingencies-earnest-money\"><\/a><\/p>\n<h2>How contingencies protect your earnest money<\/h2>\n<p>It\u2019s common to include up to five standard <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/loan-contingencies\/\">loan contingencies<\/a> in your purchase agreement. Each of these will give you the opportunity to get your earnest money back:<\/p>\n<ul>\n<li><b>Home inspection: <\/b>If the <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/home-inspection\/\">home inspection<\/a> reveals a major defect, you\u2019ll have the freedom to walk away without losing your earnest money. Just make sure you complete the inspection before the contingency deadline.<\/li>\n<li><b>Home appraisal: <\/b>You might want to move on if the home appraisal comes in significantly lower than the purchase price. In fact, unless the seller lowers the price, you might have to move on because lenders won\u2019t approve you for a <a href=\"https:\/\/www.credible.com\/mortgage\">home loan<\/a> if the <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/low-home-appraisal\/\">appraisal comes in low<\/a>.<\/li>\n<li><b>Clear title: <\/b>This contingency, like the appraisal, is connected to the financing contingency. You must purchase a lender\u2019s title insurance policy to protect the lender against competing ownership claims to the home. If the <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/title-company\/\">title company<\/a> you hire finds a problem it can\u2019t easily resolve, a title contingency allows you to exit the agreement without losing your earnest money.<\/li>\n<li><b>Mortgage financing: <\/b>It\u2019s smart to <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/preapproval\/\">get pre-approved for a mortgage<\/a> before making an offer so you don\u2019t waste your time or the seller\u2019s. Still, final approval will depend on the property being in good shape, having a clear title, and appraising at or above the purchase price.<\/li>\n<li><b>Home sale: <\/b>If you need to sell your current home before you can buy a new home, your offer might include this contingency. However, the seller might not accept an offer with this contingency. It puts them in a bad position: They\u2019ll have to wait for you to sell the home and might have to pass on other offers in the meantime. Consider a <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/bridge-loans\/\">bridge loan<\/a> to avoid this problem.<\/li>\n<\/ul>\n<p>Credible can be a big help when trying to find a great interest rate. You can easily compare our partner lenders in as little as three minutes \u2014 all without leaving our platform.<\/p>\n<p><em><strong>Check out: <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/contingent-offer\/\">Contingent Offer: Should You Use One to Buy a House?<\/a><\/strong><\/em><\/p>\n<div id=\"purchase-rate-table\">\n  Loading widget - purchase-rate-table\n<\/div>\n\n","protected":false},"excerpt":{"rendered":"<p>Earnest money is a deposit you make to show that you\u2019re serious about buying a home. To protect your earnest money deposit, you\u2019ll want to include certain contingencies in your purchase agreement \u2014 such as&hellip; <a class=\"more \" href=\"https:\/\/www.credible.com\/blog\/mortgages\/earnest-money\/\">Continue reading<\/a><\/p>\n","protected":false},"author":106,"featured_media":47929,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"inline_featured_image":false,"footnotes":""},"categories":[1463],"tags":[1534,1524,1521],"class_list":["post-47928","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mortgages","tag-home-loans-101","tag-mortgage-purchase","tag-mortgage-rates-sidebar","how-earnest-money-works-and-how-much-youll-need","post_tag-home-loans-101","post_tag-mortgage-purchase","post_tag-mortgage-rates-sidebar"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Earnest Money: How It Works and How Much You&#039;ll Need - Credible<\/title>\n<meta name=\"description\" content=\"Earnest money shows a seller that you\u2019re serious about buying a home. 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