As a house hunter, think of earnest money as your way of letting everyone know you're a serious contender. When you’re ready to put in an offer on a house you love, adding earnest money to the mix shows the seller you’re ready to make a deal.

How much does your earnest money deposit need to be?

The question everyone asks first: how much is this going to cost me? Typically, earnest money is 1 to 3% of the home’s purchase price. So, around $3,000 to $9,000 on a $300,000 house. This money will be safely held in an escrow account until the deal closes.

Keep in mind that you may need to demonstrate the source of this money and show how long it has been in your account. But here’s one cool caveat: With some loan programs, this money may also be a gift from a family member. That’s right, you don’t always have to shoulder the burden alone. The lender will just need proof that the money is indeed a gift that doesn’t require repayment.

What happens to earnest money at closing?

So, where does this chunk of change end up? When closing day finally arrives (did you even sleep a wink?), your earnest money deposit goes towards your down payment.

Earnest money is more than just a sign of interest—it's a key part of buying a home. When you make an earnest money deposit (EMD), you're giving the seller a solid sign that you're serious about your offer. This little gesture does a lot: it not only shows you mean business but also ties you to the agreement's terms. It helps ensure that you stick with the deal, keeps you on track with deadlines, and helps smooth out any bumps regarding the contract's contingencies. Especially in a hot market, earnest money can really make your offer stand out, showing the seller that you're ready and able to go through with the purchase just as planned.

What is a purchase agreement?

A purchase agreement is a contract between a buyer and seller that outlines the terms of a property sale, including the price and property details. Earnest money is a deposit made by the buyer to show their commitment to the transaction. If the buyer backs out without a valid reason, they may lose this deposit. Essentially, while the purchase agreement sets the transaction's terms, the earnest money deposit ensures both parties are serious about following through.

What does having pre-approval mean & how can it help?

Imagine you're in a competitive bidding war for the perfect property, where every advantage can make a difference. Having a pre-approval from a mortgage lender can put you in the lead. Unlike a pre-qualification which is often based on verbal statements of your salary and credit score, a pre-approval means your lender has thoroughly vetted your financial profile and has conditionally established the mortgage loan amount you qualify for. This shows sellers your financing is in a good place, giving them extra confidence in your offer. Add in earnest money, and it's clear that you're ready and able to close the deal swiftly.

Possibly, with a catch. Your earnest money can come back to you if things don't work out, but only if certain conditions, or contingencies, are met. Here are a few to be aware of:

Home inspection contingency

Let’s paint a picture: you find a dreamy house, but your inspector uncovers some major issues—for example, if the roof needs replacing, or the foundation isn’t sound, a home inspection contingency provision in the purchase agreement allows you to cancel the agreement and get your earnest money back without a fuss.

Appraisal contingency

What if the house appraises for less than the purchase price you offered? If you have an appraisal contingency in the purchase agreement, you can renegotiate the price with the seller or cancel the agreement and receive a full refund of your earnest money. No harm, no foul!

Financing contingency

What happens if your loan approval doesn't go through? Well, if you have a financing contingency in your purchase agreement, there's a good chance you can still get your earnest money deposit back. This contingency is like a safety net—it's there to protect you. But there's a catch: you need to provide your lender with all the necessary information they require to properly assess and approve your loan. If your loan doesn't go through because you missed submitting some important details, you might not get your earnest money back.

Also, keep in mind that some financing contingencies specify the type and amount of loan you're supposed to get. If you end up applying for a different kind of loan than what's outlined in your agreement and your loan application is denied, the seller might not be willing to return your earnest money deposit. So, it's crucial to stick to the agreed terms in your contingency to avoid any issues.

Contingency for selling an existing home

Need to sell your current home before you can seal the deal? You're not alone there. In such circumstances, you should consider including a contingency for selling your existing home before closing on the purchase of the new home to protect your earnest money.

Waiving a purchase agreement contingency can be tempting, especially if you're in a competitive market. But remember, it's a risk. Without contingencies, your earnest money could be on the line if things don’t go as planned.

Safeguard your earnest money every step of the way. Here’s how:

Step 1: Use an escrow account

Always opt to route your earnest money through an escrow account if possible. It’s safer than handing it directly to the seller and keeps your funds protected.

Step 2: Know your contingencies

Understanding the ins and outs of your purchase agreement’s contingencies will be your safety net for protecting your earnest money, so lean on your legal or other advisor if anything is confusing.

Step 3: Stay on track with your responsibilities

Stay vigilant. Keep a close eye on deadlines and requirements. Staying in synch with the purchase agreement’s timeline ensures that your earnest money isn’t forfeited due to missing a deadline.

Step 4: Put it all in writing

Every agreement, every change—get it in writing. This not only protects your earnest money, but also clarifies any adjustments to the purchase terms.

Let’s examine how earnest money functions in some real-world scenarios—that you’ll hopefully never have to face.

The forfeited deposit

Say you put down earnest money on three homes and plan to decide later which one you’ll buy—we get it, it’s nice to have options. However, unless you have a contingency that allows for recovery of the earnest money, the sellers of the homes you don’t choose in this scenario may keep your deposits as compensation for taking their properties off the market. Hey, it's only fair.

The failed offer

Here’s a tough scenario: you lose your job and can’t secure a mortgage. If you don’t set a financing contingency, you might lose your earnest money. But with one, you may recover the deposit and regroup without financial stress. Make sure to always carefully read your purchase agreement.