What is Earnest Money?

You made an offer on a house and the sellers accepted it. Congratulations! The next step you need to take is providing the “earnest money." Considered a good faith deposit, earnest money demonstrates to the seller that you're serious about completing the purchase. It acts like transaction insurance for the buyer and the seller. Buying your first home can be overwhelming with all of the terms and steps. Here's everything you need to know about earnest money.

What is earnest money?

Earnest money is a deposit. The amount you will provide is written in your purchase agreement. If your offer is accepted by the sellers, you'll need to provide the money within a timeline that is also stated in your offer. Instead of writing a check directly to the seller, however, the earnest money deposit (also called an EMD) goes to a third-party title or escrow company that processes the real estate transaction. This company holds and protects these funds until closing. Then they apply them directly to your down payment.

Why do I need earnest money?

When a seller accepts your offer, they take their home off the market until the transaction is complete. If the deal falls through for any reason, the seller must put their home back on the market and start the selling process all over again. The lost time may also mean lost opportunities. If a buyer gets cold feet or finds another home they like better and wants to back out, the seller gets to keep the earnest money as a form of remuneration for their trouble.

How much earnest money do you need?

The amount of your deposit usually depends on the price of the property and the real estate market. Earnest money typically falls between 1% and 5% of your purchase price.1 Higher amounts are more common in a seller's market where a property may receive multiple offers. Your real estate agent will provide you with advice on how much earnest money you should offer.