What Is Earnest Money and How Much Should I Put Down?

The homebuying process can be taxing at times. Finding the right home for you and your family is hard enough, but the weeks that follow while your loan is created and processed are just as, if not more, demanding. With that in mind, what if we told you there was something you could do before making an offer on your home that could make the events that follow a little easier? To show the seller you’re committed to moving forward with the transaction, consider making an earnest money deposit (EMD). That’s an excellent way to show your offer is genuine. So, what exactly is an EMD?

The Definition

Earnest money or an EMD is a monetary representation of your good faith. You give the seller an earnest money deposit as part of your initial offer to safeguard them if the deal falls through due to an indefensible issue on your end. If you back out of the deal without reasonable cause, you won’t receive your money back.

For a little more context, put yourself in the seller’s shoes. After they accept your offer, they might take their home off the market. The entire loan process will play out on your side, but if you make the choice to rescind your offer after having second thoughts, the seller will need to relist after wasting their precious time, energy, and resources. An EMD is protection for the seller if such a situation ever arose.

Of course, if the circumstances are reversed and the seller pulls out or fails to meet the contingencies of your agreement for any reason, you will get your money back. If one of the contingencies in your purchase agreement says the home needs to pass certain inspections and it doesn’t, the seller will return your earnest money. For some loan types, such as the VA loan, your money will be returned immediately if the home’s appraisal value ends up lower than the purchase price. Speak with a Mortgage Banker to learn more about which loans incorporate a similar clause.

But enough about the negatives. Let's focus on what happens if your deal goes through. Although every state has their own regulations, by and large, your earnest deposit will be held in an escrow accountA separate account your lender sets up to ensure payment of certain expenses like taxes and homeowners insurance.escrow accountA separate account your lender sets up to ensure payment of certain expenses like taxes and homeowners insurance.. Eventually, the money will be put toward the down payment and paying for closing costs. If your loan doesn’t require a down payment or the seller is paying for the closing costs, your money will simply be repaid to you. Now, you may be asking yourself, how much money is the typical EMD?

How Much Should You Put Down?

There’s no right answer to how much money should make up your earnest deposit. There are too many variables to settle on a ballpark figure. It depends on the property’s location, the number the seller is looking for, and the home’s price. As a general rule, an EMD is no more than five percent of the sale price. But again, every situation is different.

Perhaps you’ll put down more money if the home has a competitive market. And maybe you’ll put down less money if the seller is rushing to sell. Get a good sense of the number of bidders and the seller’s intentions before settling on your deposit’s value. You might want to get your real estate agent’s opinion before making your offer, as well.

It’s All About Standing Out

Don’t forget, the point of making an EMD is so the seller will view you as the most trustworthy partner for the home selling transaction. In a competitive market, an earnest deposit informs the seller you’re dedicated to the agreement and will execute every task demanded of you. That’s an appealing quality for the seller. However, the earnest money deposit is not the only way to position your offer in the spotlight. Learn more about pre-approval, conditional approval, and pre-qualification in one of our other articles from the Knowledge Center.