Earnest money is a key part of the home buying process. However, once this money is committed, you’re at risk of not getting it back. It’s important to understand how this money gets handled and know what you need to do to safeguard it.
What is an earnest money deposit?
When a buyer is ready to commit to a house, they will need to pay a deposit that helps fund the down payment. This good faith deposit is referred to as earnest money and typically occurs at the time the buyer places an offer, which is surprising to many first-time homebuyers.
It’s important to remember that an earnest money deposit is not the same thing as a down payment. However, if the sale goes through, the earnest money will typically be applied toward the down payment.
Earnest money helps sellers know that you’re serious and ensures that buyers don’t make offers on multiple homes at the same time.
How much of an earnest money deposit is required?
In California, there is no standard earnest money amount that is required for each home offer, however, rules around earnest money do vary by state. Typically, the amount of earnest money depends on where the home is located, but it’s usually 1-3% of the total offer price.
Sellers may ask for more than three percent, but that can deter buyers from making an offer in the first place. When market conditions are favorable for sellers, they are more likely to ask for more earnest money deposit. As a buyer, you can also offer to include a higher amount of earnest money to show buyers how committed you are to the purchase. In some cases, this could increase a buyers odds of having their offer accepted.
How to protect an earnest money deposit
First and foremost, make sure you understand the terms of your earnest money refund in your purchase contract.
According to real estate agent Elizabeth Weintraub, “In California… purchase contracts allow for the return of the earnest money deposit to the buyer within a specified time period should the buyer elect to cancel the transaction. If at that point the seller refused to return the deposit without cause, the seller could end up paying a $1,000 civil penalty to the buyer.”
Next, ensure your earnest money gets deposited to the right hands. While most home sellers are legitimate, there can be the risk of scam.
Here are a few tips to ensure that your money remains secure:
- Never give your earnest deposit directly to the seller.
- Make your deposit to a reputable intermediary like a well known real estate, legal, title or escrow company and be sure to verify that they are appropriately licensed and in good standing.
- Verify that the third party will deposit the funds into a separately maintained trust account.
- Get a receipt for your deposit.
- Don’t release your earnest money until the transaction closes.
Putting down earnest money can be intimidating for first-time home buyers, but we hope you now have a clear understanding of what it is and how to go about it successfully.