An earnest money deposit is the amount a buyer puts down to show serious intent to purchase a home. Buyers usually submit this deposit shortly after the seller accepts an offer. In most cases, the amount ranges from 1% to 3% of the home’s listing price, though the exact number depends on local market conditions.
This deposit shows the seller that you plan to move forward while you finalize financing, inspections, and other contract steps. The more competitive the market, the more important earnest money becomes.
Why earnest money matters in a competitive market
In hot markets, sellers often look beyond price. A strong earnest money deposit can make your offer stand out. A larger-than-average deposit signals commitment and reduces the seller’s fear that the deal will fall apart.
Some sellers or listing agents may even request a flat earnest money amount regardless of the home price. In bidding situations, increasing your earnest money can help you win the deal without raising your offer price.
Can you borrow earnest money
In most situations, you cannot borrow your earnest money deposit. Lenders treat this money as good faith funds. They want to see that you can use your own assets to support the transaction.
Using borrowed funds raises red flags for lenders. It suggests financial strain and increases perceived risk. Paying earnest money with your own funds shows reliability and strengthens your loan application.
How lenders verify earnest money
Lenders require proof that your earnest money comes from acceptable sources. They verify and document the funds during the underwriting process. For this reason, you should never pay earnest money in cash.
Buyers typically provide a bank statement to show the funds came from a personal account. Each lender may request different documentation, but all require a clear paper trail. Planning ahead avoids delays later.
Can earnest money come from a gift
Yes, earnest money can come from a gift in certain cases. Close family members or friends, such as parents or siblings, can provide the funds. When you use gifted earnest money, the lender must document the source.
This process usually requires a signed gift letter confirming that the money does not need repayment. Gifted funds offer a helpful option if you do not have enough cash on hand.
Where to place earnest money in FSBO transactions
In a for sale by owner transaction, never hand earnest money directly to the seller if you can avoid it. Instead, place the deposit with a neutral third party such as a closing attorney, escrow company, or title company as beycome title.
This approach protects both sides. If the deal falls apart under valid contract terms, the third party can return the funds properly. Direct payment to a seller increases risk and complicates disputes.
Final takeaway
Earnest money plays a critical role in real estate transactions. It strengthens your offer, shows commitment, and builds trust with the seller. Plan ahead, use approved funds, document everything clearly, and protect yourself by placing the deposit with a neutral party. A well-handled earnest money deposit helps keep your deal on track from offer to closing.
