How Much Earnest Money Is Enough for Your Offer?

What is earnest money?

Earnest money is a good-faith deposit you make after a seller has accepted your offer to buy their home. You might think of it as a security deposit to guarantee that you’ll meet all the obligations listed in your sales contract.

Buyers who make an earnest-money deposit have more at stake, so they’re more likely to complete the sale, according to David H. Schulz, broker and owner at Schulz Realty in Naples, Florida. That makes it less risky for the seller to take their property off the market when they accept your offer. 

How much earnest money is typical?

The typical earnest money deposit is 1% to 3% of the offer price. But what’s “typical” on a national basis isn’t necessarily typical for a particular market.

For example, buyers usually offer just 1% in Richmond, Virginia, according to Scott Waters, Realtor at Real Broker LLC in Glen Allen, Virginia. 

One percent is also typical for buyers represented by Savvy Buyers Realty, located in St. Petersburg, Florida — but there are exceptions. 

“If there is competition from other buyers on the property, we advise buyers to consider going up to 2% of the purchase price,” said Robert Washington, the brokerage’s founder.

Two percent is the standard in Scottsdale, Arizona, according to Jo Ann Bauer, an associate broker and Realtor with Coldwell Banker. Earnest deposits for luxury properties might be several percentage points higher, she said.

Schulz Realty recommends that its Naples, Florida, buyers go even higher, to 10% — 1% within three days of signing the contract, and 9% within 15 days of signing. This due-diligence approach gives the buyer a chance to inspect the property before committing a full 10% upfront. 

How much earnest money should you offer?

Bauer suggests consulting with your buyer’s agent to determine how much your earnest money deposit should be.

She advises her clients to provide the lowest amount possible, unless the market is competitive, or the property has multiple offers.

A little searching can also guide you to a decision.

Schulz recommends thinking about how strong your desire is for the house and location, and how difficult it might be to find another home you like if this deal falls through.

How do you pay earnest money?

Typically, you pay your earnest money deposit by certified check or wire transfer, although some states allow cash or bank check. Buyers usually pay it after their offer has been accepted. Your offer should include the amount you intend to pay and when you intend to pay it.

Who you pay it to varies by location. In Pennsylvania, for example, it’s customary for the seller’s broker to hold it in escrow until closing. In other locations, an attorney or escrow or title company holds the funds in escrow until closing. 

Is earnest money the same thing as a down payment?

No. Earnest money is a deposit that gets credited to the buyer’s cash due at closing. That cash due includes line items like the down payment and closing costs. But the earnest money is applied to the total cash due rather than to a particular line item.

When is earnest money refundable?

Earnest money is refundable only under specific circumstances.

“In Virginia, a client is eligible for a refund on the earnest money deposit if the two parties cannot come to a meeting of the minds and all parties agree to terminate the contract,” Scott Waters noted.

If your accepted offer included contingencies, you could be entitled to a refund even if the seller doesn’t agree. Real estate contingencies are specific situations listed in the sale contract that would make it impossible or undesirable to complete the sale. For example: 

• Financing: The financing contingency lets you back out if you’re unable to get a mortgage loan by the date listed in the contract. Depending on the state, you might be able to specify the type of loan, the loan-to-value ratio, and the maximum interest rate.
• Appraisal: The appraisal contingency lets you terminate the contract if the home doesn’t appraise the amount given in the contract, usually the purchase price.
• Inspection: The inspection contingency lets you cancel the sale if your home inspection shows that the home’s condition is unsatisfactory, and you’re unable to negotiate an acceptable resolution.
• Home sale: This contingency, which Schulz said is in his Florida sales agreement, lets you out of the contract if your current home doesn’t sell by the specified date.

Earnest money may also be refundable if the seller of a home in a community governed by a homeowners or condo association fails to provide the buyer with a resale certificate and association documents by the state-mandated deadline. The documents include association bylaws, declaration/restrictions/covenants, financial statements, and other important information. 

How to protect your earnest money

The best way to protect your earnest money is to understand and honor your contract.

“A client can lose their earnest money deposit when they decide to back out of the transaction not related to any contingencies," Waters said. He recounted a $1.2 million deal in which his buyers forfeited $20,000 in earnest money deposit when they changed their minds the night before closing and canceled the sale.

The other way to protect your earnest money is to only pay it out to a third party.

Many buyers' agents deliver their client’s earnest money check to the seller’s agent, who then turns it over to their broker for deposit into the escrow account. Schulz warns against this practice.

“Never, ever, ever give the earnest money directly to the seller or their agent; that is how fraud (theft) is committed.” he said.