You’ve found a home you love, and you’re ready to make an offer. How do you let the seller know you’re serious about the house?
You pay what’s called an earnest money deposit. This amount – which varies based on the market and the selling price – is put into escrow and goes toward your down payment on the house.
If you back out of the sale for no reason, the deposit goes to the seller for their trouble. After all, they took the house off the market and refused other showings because of your offer. If you back out of the sale because of a contingency related to the inspection, you will get most of the deposit back; some will be kept for administrative fees.
In slow markets, the earnest money deposit can be as little as $500 or $1,000. Generally, though, you’ll find that the deposit is 1 to 2 percent of the sales price. In hot markets, that can increase to 2 to 3 percent of the sales price. Most sellers will not accept an offer without an earnest money deposit.
Why? Imagine this scenario: A buyer places offers on three homes without making deposits. They go through the process of negotiating with all of the sellers to weigh their options and get the best deal. In the meantime, the sellers have refused showings and offers and possibly spent money to make repairs based on inspections. In the end, you choose one house and leave the others empty handed.
The earnest money deposit prevents that from happening. It’s a commitment to the seller to follow through with the sale.
