Earnest money: what it is and why you need it

Depending on the market, some homes could be selling like crazy, and you need to show you're a serious buyer. That's where earnest money comes into play. 

In this article, you'll learn about earnest money — what it is, how much to put down, can you get it back, and more. And how Opendoor can help you get an edge over other buyers to secure your future home.

In this guide:

• Are You Serious?

• How Much Do I Put Down?

• Where Does it Go?

• If Something Goes Wrong, Can I Get My Money Back?

Are you serious about making an offer?

This question should be running through your mind when you find a place that you like. If you want to show a seller that you’re considering buying the house, earnest money needs to be on your radar so that you can make your next move.

Think about this for a moment. If you were a seller and met an eager buyer, ready to move into their new home, you would want them to show something other than just enthusiasm to show that they are acting in good faith and are serious about buying. 

Earnest money (your initial deposit) does just this. It takes the buyer’s enthusiasm and shows it in cash, ensuring that the seller knows that they are ready to move forward if their offer is accepted.

You should budget to make an earnest money deposit when putting in an offer on a home. The main reason for this is that sellers often won’t even consider your offer unless you have an earnest money deposit. If you don’t have the resources to put down a reasonable earnest money deposit, it may be best to wait until you have things ready.

We’ll get to how much you should put down and what the earnest money will go towards in just a moment. But remind yourself of this important step so that when you find that perfect house, you’ll be ready to show the seller you’re serious.

Remember:

• The seller will most likely not accept your offer if you don’t have an earnest money deposit. Don’t miss out on a great opportunity by not having earnest money.

• Earnest money shows that you are serious about buying the house.

• Think to yourself if you were the seller, what would you expect from a potential buyer?

How much do I put down?

A common question in the homebuying world is how much should you put down? It’s a good thing to ask because if you don’t put down enough earnest money towards a home, the seller may not accept your offer and go with a higher one. You want to offer an amount that works for you and is appealing to the seller. 

An earnest money deposit typically ranges from 1%-2% of the total purchase price. For example, if the home’s total price is $250,000, an earnest money deposit could be anywhere between $2,500 to $5,000. 

How much you are willing to put down depends on many factors. One thing to keep in mind is how competitive the market is. Suppose the current market has a lot of buyers constantly making offers on houses. In that case, you might want to consider putting in a higher earnest money deposit, even above the typical 2% mark. This higher deposit would ensure that your offer stands out amongst the rest.

When you keep the factors listed above in mind – the total purchase price and the level of competition in the market – you’ll have a clearer picture of how much your down payment should be.

In short:

• The typical range for an earnest money deposit is between 1%-2% of the house’s purchase price.

• Depending on the market, you may have to go above and beyond with your earnest money deposit so that your offer stands out amongst the rest.

• Consult your agent for advice on the best course of action.

• Prepare ahead of time on how much you are willing to put in for an earnest money deposit.

Where does your earnest deposit go?

You put forth your earnest money, and now you’re wondering, where does it go? Depending on what state you live in, your earnest money will end up in different places to be held.

In some states, the real estate broker will hold your money in an escrow account to ensure it does not get mixed with other funds. If your earnest money gets mingled with other funds or accounts, this could be a huge problem for the real estate company. 

Never give it to the seller. This could come with serious problems, one of the main ones being having a hard time getting your money back if a contingency was not met, the home has problems, etc. We will get to what triggers a refund in just a bit, but remember, it is always best to make sure your escrow money goes to a trusted real estate broker or title company.

Knowing where your money goes is extremely important. Home buying is a huge investment, and you want to make sure that if something goes wrong, you’ll be able to get your money back from trusted people.

In Short:

• Your earnest money will typically go to an escrow account, whether the real estate broker’s or title companies depending on the state you live in.

• Never give your earnest money to the seller; you may not be able to get this back, depending on how the transaction goes.

• Research the title company or real estate broker that will hold your earnest deposit.

If something goes wrong, can I get my earnest money back?

No one ever wants a deal to fall through; we especially hope that your transactions always go peacefully with as few obstacles as possible. However, things happen, and there are times when transactions fall through, and a transition of ownership does not happen.

When this happens, you would want your earnest money back. The short answer is yes, but you should be educated as to what goes into refunding your earnest money deposit so that you can ensure you get back as much as you can.

The contract

This is one of the most important parts of getting a deposit returned. If there is nothing in the contract as to how to get your deposit returned, then the likelihood of getting back the full amount could be more difficult.

In the contract, there should be an agreement on how a refund should be handled if a situation occurs. Be meticulous and detailed as possible with this. Ask questions to your agent about refunds, and make sure you understand the circumstances which would entitle you to a return of your deposit. 

Some things that could trigger a refund:

• Contingencies

• Problems with property

• Title insurance

One contingency that could affect the future of a transaction is a financing contingency. If the buyer is unable to obtain financing on the house, this contingency will ensure that the buyer can get their earnest money back.

The condition of the property could also prompt a refund. An inspection clause could back your eligibility for a refund in some cases. An inspection clause gives a homebuyer the right to request an inspection on their new home during a fixed time period before closing. If the results of your home inspection include major issues with the property you are purchasing, you may be able to ask for a reduction to the total purchase price.

Finally, failure to get title insurance could also halt the transaction and trigger a refund. You will need to make sure that this is somewhere in the contract in case it happens. 

Hopefully, these things won’t happen to you, but it is always better to be educated so that you can respond properly.

What if I back out?

Earnest money shows the seller that you act in good faith and are seriously interested in buying the property. However, your mind can change, and you might find you’re not interested in the home anymore. In cases like this, will you be able to get your money back?

The answer to that is simple: It depends on a few things. More likely than not, the seller will want to keep at least a portion of your earnest money.

You may think that this is somewhat unfair, given that you never obtained the house. However, you have to remember this: time is money. The seller has to go through many steps to sell their house. If they accept your offer and you change your mind, they may want to keep some money as compensation.

Before you put your money anywhere, it is of utmost importance that you really want the home and are ready to invest in it. Changing your mind once you have already given your earnest money can have consequences. Not only did you lose out on time, but money as well, money that could’ve been used for another home.