Once you have found your dream home, how do you secure it before another buyer snaps it up? The average buyer takes eight weeks and looks at eight properties before finding the perfect house. Why let such a lengthy process go to waste and lose the home to a competitive buyer? You need earnest money to ensure the seller withdraws the property from the market.

Also known as a good faith deposit, earnest money demonstrates your seriousness about buying the home. So, let’s find out how to use earnest money to ensure you edge out the competition in the property market.

What is earnest money?

Earnest money is a deposit offered to the seller that reassures them of the buyer’s good faith to purchase the house. It gives the buyer greater flexibility to secure financing, organize home inspections, and conduct a property appraisal before closing the sale. 

What is earnest money used for?

Effectively, real estate acts as a deposit. Like the deposit you pay to the bank to secure a home loan, buyers pay earnest money to the seller to secure the property. Generally, it ranges between 1 - 10% of the purchase price. It isn’t a contractual obligation. However, it can provide greater flexibility, more time, and a guarantee that the property is off the market.

Why is earnest money necessary?

You should consider offering earnest money to the vendor if you’re serious about purchasing a house. If you express interest, the seller will ask for a good faith deposit to safeguard their interests. 

It’s an excellent idea in a high-demand area. Offering a competitive good faith deposit might endear the seller to select you over other buyers. If you cannot afford a deposit, you might still be able to purchase the property, provided no other buyer has swooped in and snapped it up while you organize finances and inspections.

How much earnest money do you need to offer?

The amount of earnest money you pay depends on the property, location, and real estate market conditions. Typically, you should pay around 1 - 3% of the property purchase price. However, if the property is in a trendy area or we’re experiencing a seller’s market, you might expect to pay up to 10%. 

Speak to the real estate agent about how much earnest money you should offer.

Where does the earnest money go?

Typically, your earnest money goes to the escrow or title company. They hold it until you settle the transaction with the seller. You can pay your earnest money deposit with a personal check, cashier’s check, money order, wired funds, or cash. It likely depends on the terms of your contract.

Once the sale closes, your earnest money will usually go towards your down payment and closing costs. However, there are some instances where you can reclaim your money.

  • If the seller doesn’t fulfill their side of the contract, e.g., did not carry out agreed plumbing repairs after the home inspection.
  • If you have contingencies, such as being subject to home loan approval or appraisal contingency.
  • If the offer is contingent on selling your current home within a period.

Contingencies enable you to negotiate your contract terms. For example, if the home inspection reveals the property needs urgent plumbing maintenance, you can ask the seller to perform the repairs or reduce the asking price. If the seller reduces, the contingency will allow you to withdraw from the contract and receive your earnest money back.

When does the seller keep earnest money?

If you fail to meet the terms of your offer, you might lose your earnest money to the seller. For example, if you back out for any reason not listed as a contingency or find an issue after the due diligence period. If you still want to purchase a home with potential problems, such as cracks in walls, speak to the seller’s real estate agent about extending the time frame.

How do you protect earnest money?

To protect your earnest money, include all contingencies for financing and inspections in the contract. Furthermore, ensure you understand the terms of the agreement. This is especially important when it comes to deadlines. 

You don’t want to risk your earnest money because you miss a deadline. Finally, enlist a reputable third party to handle the deposit appropriately. Never give the deposit directly to the seller.