Putting down earnest money is the confirmation of an agreement between a buyer and seller. It’s also an indication that the buyer is willing to follow through with the agreements written out in the contract.

While a real estate broker usually holds the deposit, it can also be held with the buyer or in an escrow account.

A seller usually will not accept an offer without an earnest money deposit!

What’s great about this concept is that it essentially takes the house off the market, making it unavailable for anyone else to purchase. If all goes according to plan, these funds eventually act as part of the down payment on the property.

So how much should you put down? Initially about 1-3% of the price of the home. This means that a $150,000 home should have an earnest money deposit ranging from $1,500 to $4,500. Other sellers may ask for a straight fee instead of a percentage.

There are some circumstances where earnest money is given back without penalty:

  • If an appraisal reveals it’s worth less than the asking price. This is because a lender will only pay out the lower number, leaving you to cover the rest. The buyer can then ask the seller to make up for it by covering the closing costs, for example. But if neither party can come to an agreement, the money is given back.
  • Your financing didn’t quite work out. This doesn’t include when buyers turn down lenders because they didn’t “like” the interest rates offered. The buyer must be denied by a lender within a certain timeline as defined by the contract.
  • A major flaw is discovered. Home sales are contingent on an inspection. Fixable issues are usually not a problem, but problems with the foundation, electrical wiring, mold, or flooding can cost way more than inspected. You can either renegotiate or simply cancel the contract and back out.

If the seller backs out for any reason, this is another case where you are able to get the earnest deposit back.