How Much Earnest Money For A House

vi Min Read | Sep 24, 2021

People in the real estate business absolutely love their jargon. During the dwelling-buying procedure, you'll likely hear a agglomeration of complicated phrases tossed around like candy at a parade. But if you're new to it all, it tin feel more intimidating than fun.

Don't worry though. A lot of these niche terms you won't need to memorize, which lets you focus on understanding the large ones, similarhostage money, that can really make a dent in your home-buying journeying if you don't have it when it's time to brand an offer. So let's get crystal clear on what hostage coin is and what it ways for your home purchase.

What Is Hostage Coin?

Earnest money is like the old storytelling cliché:It's better to show than tell. You lot're showing the seller that your offer on their domicile is sincere—or hostage—by putting money down every bit a skilful faith gesture to secure your offer. Typically hostage coin amounts to i–5% of the purchase cost. In render, the seller agrees to take their home off the market place, make it available for inspections, and stop any agreed-upon repairs or provide disclosures to help complete the sale.

Find expert agents to help yous purchase your home.

While you await to close on your home, the money is deposited into an escrow account with the seller's broker, title company or escrow company. This business relationship stows your cash until endmost day. Then, the earnest money is subtracted from the amount you owe and often put toward the endmost costs. And in the event that the deal goes sour, you can typically get your earnest money dorsum depending on the contingencies outlined in your sales agreement. (We'll talk more about this later.)

Now, earnest money isn't technically required, but it'due south pretty much standard these days. If at that place is any competition in your market place at all, you'll want to put down earnest money and then that a seller will take your offer seriously—which pretty much sums upwardly the purpose of hostage coin.

How Much Earnest Money Should I Put Down?

The brusque answer is that you need 1–v% of the price that you and the seller agreed upon. The longer answer begins with: "It depends."

Considering information technology really does depend on a number of factors—mostly related to where you are. In some markets, you'll need a fixed amount—similar $1,000 or $5,000. In other communities, the focus is on the percentage. In really hot real manor markets like Silicon Valley, it'due south non uncommon to see six-effigy earnest money deposits.

Because that'south not chump change, talk with your real estate amanuensis about how much hostage money they suggest to help yous play by the rules in your area.

Is Hostage Money the Same as a Downward Payment?

Now, before we move on, let'due south make sure we're articulate that your earnest coin isnon your downwardly payment. Your downwards payment is completely split. Information technology's what you pay up front to secure your home's financing—and it should exist 10–20% of the purchase price of the dwelling with a 15-yr fixed-charge per unit mortgage. Think of information technology this way: earnest money secures your offering and a down payment secures your financing.

That ways when yous're calculating how much it'll cost you lot to buy a firm, lump your earnest money into what you program to relieve for endmost costs. Earnest money is but due upwardly front when you make the offer, dissimilar the downwards payment and closing costs, which are technically due afterward when you close on the dwelling.

Exercise I Get My Hostage Money Back Subsequently Endmost?

You lot may be request yourself, "Does my earnest money get refunded?"

If everything goes the way it'southward supposed to, the earnest money gets folded into your endmost costs like salary bits into pancake batter (trust united states—it's delicious). But yous'll need to be conscientious and read your contract because there are several ways yous could lose your hostage money deposit.

Make sure your agent builds these contingencies into your contract and then you tin get back your earnest money if:

The home doesn't go appraised at the offering amount. Maybe you make a $200,000 offer on a home that turns out to be worth merely $150,000.
The home doesn't pass the home inspection. The home could have significant structural impairment or need a new roof and y'all may not be able to come to an understanding with the seller to make the repairs.
You can't get financing. Things happen. Your lender could change ownership or you might encounter another hiccup in the finance process.

Y'all'll besides want to pay attention to the deadlines in the contract. There volition usually exist a difficult date for closing, and your existent estate agent can really help you lot here. If it looks like it may take longer to adapt your financing than you lot originally thought, yous may be able to renegotiate the date to go along things moving smoothly and salvage that earnest money deposit.

If yous demand help getting a preapproved for a mortgage so you tin can put down an offer on the home of your dreams, talk to our friends at Churchill Mortgage. They're experts at navigating the mortgage lending procedure, credit score or not, and will truly put y'all offset.

Can a Seller Keep My Hostage Coin?

While yous can often get your earnest money back in cases where no rules of the contract were cleaved, keep in mind that there may come a fourth dimension when you just demand to walk away from the deal birthday. Something unexpected—like an accident, a divorce or a dream that causes you to rethink your entire life—could happen. In these cases, be prepared to walk away without your earnest money.

In hot markets, some buyers use a risky strategy to get a leg up on the contest and offer nonrefundable earnest money. That ways the seller gets to keep the cash if the sale falls through for whatever reason. That'due south right. Even if a UFO flies straight from Neptune to your prospective home and beams the whole matter up into the nebulous unknown, you're out of luck. Before you go for this tactic, talk to your existent estate agent nearly your options and brand sure you don't offer coin you lot can't afford to lose.

Piece of work With a Real Manor Agent

While earnest money isn't also hard to understand, there's a lot involved in purchasing a home that's probably (to say it gently) over your head. That's why the best way to navigate the home-buying process is with the guidance of a trusted professional. Ourexistent estate Endorsed Local Providers (ELP) are experts in your local market and take proven track records of excellence. They will take you through the process footstep-by-step and make sure everything goes correct.

Observe an agent in your area today!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and heighten their lives through personal evolution since 1992. Millions of people have used our fiscal advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which take over 17 million weekly listeners. Learn More than.