How Much Earnest Money or Deposit on Real Estate?

How is an earnest money determined on an offer to buy property since you still need to come up with a down payment?

1 Answer

The subject of earnest money deposits is widely misunderstood.

Start out with the idea that they are absolutely not required at all. Instead, this type of preliminary payment by a prospective buyer developed as follows:

Imagine that you have found a house you'd like to buy, and learn that three other prospective buyers are also interested. You would very much like the seller to understand how serious you are about the offer you're making to buy the house.

So, you decide to send some money along with your offer. This is your way of letting the seller know you are very serious about your offer, because you stand to lose the money (the seller may be able to keep it) if you change your mind and decide not to proceed with the purchase after all. You might lose the deposit, because if the seller accepts your offer, and then you just don't bother applying for a mortgage, the house has been off of the market for a while, and the seller has lost the opportunity to entertain other buyers' offers. When you submit an earnest money deposit, you are telling the seller that you're willing to lose the money if you don't proceed with the sale.

There's no hard and fast rule about how much the deposit should be. If you make an offer of $100,000, and submit an earnest money deposit of $1,000, that $1,000 will be applied to the purchase price at the closing (so that you will only have to come up with an additional $99,000). Talk to your local real estate licensee about what amount for the deposit is customary in your area.