What is an Earnest Money Deposit?

Are you getting ready to buy a house? Once you find a property you love, you need the seller to know you’re serious. There’s one way to prove your commitment—make an earnest money deposit into an escrow account. Take a closer look at what earnest money is and when it’s refundable.

What is Earnest Money?

When you make an offer on a house, the purchase agreement might require an earnest money deposit, also known as a good faith deposit. Earnest money is placed in an escrow account, where neither party can touch it until the deal is closed. This protects both the buyer and the seller during the transaction. The purpose of earnest money is to decrease the likelihood that a buyer will place offers on multiple homes, then leave all but one seller high and dry.

How Much Earnest Money Should You Offer?

Typically, earnest money deposits equal 1 to 3 percent of the home sale price. The exact amount depends on the local real estate market. In a hot market where cash offers and bidding wars are common, you may need to offer more earnest money than you would in a languishing market. A professional real estate agent can recommend the amount of earnest money you should offer.

How Does the Escrow Process Work?

As soon as you and the seller agree upon a price and sign a purchase agreement, your real estate agent helps you open an escrow account and make your earnest money deposit. A neutral third party, such as a bank or another financial institution, serves as the escrow agent.

Once the money is in escrow, several things must happen before the sale is finalized. For instance, you need to get approved for a mortgage, have the home appraised and inspected, obtain homeowner’s insurance, and conduct a title search.

After these steps are complete, it’s time to close on the property. This involves signing lots of paperwork, including a new deed naming you as the property’s owner. When everything goes as planned, the earnest money is applied toward the down payment or closing costs. Your mortgage lender will also wire loan funds to escrow so the seller and the seller’s lender, if applicable, can be paid.

Is Earnest Money Refundable?

If any contingency in the purchase agreement isn’t met, the buyer can get their earnest money back. The most common earnest money refund contingencies include:

  • Home inspection contingency: If an inspection report reveals that the home needs repair, the buyer can back out and have their earnest money refunded—or they can work with the seller to either make the repairs or lower the sale price.
  • Appraisal contingency: If a third-party appraiser values the home at less than the sale price, the buyer can choose not to move forward and get their earnest money back—or they can negotiate a new price with the seller.
  • Financing contingency: If you can’t get approved for a mortgage after offering earnest money, you have the right to walk away and get your deposit back.
  • Home sale contingency: Some earnest money contracts have a contingency that lets you back out with your earnest money in hand if you can’t sell your current home before closing on the new one.

Remember, if the buyer backs out of the deal simply because they change their mind, the seller gets to keep the earnest money. That’s why you should only make an earnest money deposit if you’re serious about buying the house.

Are you ready to start house-hunting? Vutech & Ruff makes the process as easy and stress-free as possible. We’ll help you find your next home, overseeing the entire escrow process and ensuring you understand what needs to be done every step of the way. Get help shopping homes for sale in Columbus, Ohio—call us at 614-897-0618 or contact us online today!