Earnest Money – How Much Earnest Money Do You Need?

Earnest Money is an amount of money used as a form of commitment by someone to show how serious they are about purchasing a home. It is also referred to as a good faith deposit.

In a situation where a buyer and seller enter into a contract, the seller has to take the home off the market, while the transaction moves through the entire process to closing. If the deal falls through, the seller is to relist the home and start all over again, which results in a big financial hit.

Earnest money acts as a form of protection for the seller if the buyer happens to back out. This money is typically around 1% – 3% of the sale. Price and is being held in an escrow account until the deal is complete. If the deals click. The earnests money is applied to the buyer’s down payment or closing costs.

In a situation where the deal falls through because of a failure. A home inspection or any other contingencies that are listed in the contract. The buyer gets their earnests money back.

Why Pay Earnests Money?

Even though paying earnest money is not a requirement. It could be a necessity if you are shopping in a competitive real estate market. With earnest money, sellers tend to favor these good faith deposits. Because they want to ensure that the sale won’t fall through. Earnest money acts as added insurance for both the buyer and the seller in the transactions.

How Much Earnest Money Do You Need?

You need 1-5% of the price that you and the seller agreed upon. On the other hand, it may also depend on a number of factors, mostly linked to where you are. Some markets require a fixed amount like $1,000 or $5,000, while in other communities, the focus is on the percentage.

How To Get Your Earnests Money Back

Earnest money comes with contingencies that protect both the seller and buyer in certain situations. If you make an offer on a home and the seller accepts, the sale is only finalized when contingencies or certain criteria are met. These contingencies are typically listed in the purchase agreement and cover the inspection, appraisal, and mortgage approval. They include:

Contingent on the appraisal

VA loans instantly protect a buyer’s earnest money in a situation where the appraised value comes in below the purchase offer. This protection is a part of every VA purchase loan.

Contingent on a home inspection

This is a contingency that allows you to walk away from a home with your earnest money if the inspection reveals unsatisfactory housing conditions.

Contingent on obtaining financing

With this contingency, you are assured that you get an earnest money refund if you do not receive proper financing in time.

Contingent on selling your current home

If you are unable to sell your house before closing on your new home, this contingency will enable you to walk away with your earnest money.

These contingencies have been developed to safeguard you from the unexpected, and you can also negotiate these conditions with the seller before you sign the contract.

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