Are Earnest Money Deposits Required?
Making an earnest money deposit is not a requirement when you submit an offer on a house. However, your offer won’t likely receive serious consideration without a good faith deposit of some kind, especially in a competitive real estate market. So although it's not required, be prepared to offer earnest money if you’re serious about the home.
If you can’t afford an upfront earnest money deposit, let the real estate agent and seller know right away. If your purchase method and financing look solid, it is possible the seller will agree to move forward with the sale. If not, and you are serious about the purchase, you may be able to ask a family member or friend to assist with a gift or loan of funds for the good faith deposit. Do not, however, obtain an institutional loan or cash advance from a credit card for your deposit, as it could be detrimental to your mortgage loan approval. This payment is meant to secure the property, not put it at risk of losing it.
How Much Earnest Money Is Enough?
The amount of earnest money you should offer depends on the particular real estate market your desired property is in. A listing in a slow or moderate market may not
need as much of a deposit as one in a hot market where there might be multiple buyers competing for the same property. Earnest money is typically around 1% to 3% of the sale price, but again, plan
to pay more in a seller’s market so you do not lose the home to a stronger offer. Your real estate agent will be able to guide you on your good faith offer.
How Does Earnest Money Work?
Your purchase agreement will outline how the earnest money is handled, but your deposit is typically paid to the escrow or title company, which is held until the
transaction closes. You can pay via personal check, cashier’s check, money order or wired funds, depending on the terms of your contract. Once deposited, the listing will be flagged as pending,
in effect removing the property from the active market. Following will be various inspections, appraisals, and any other contingencies outlined in your contract to move forward in finalizing the
sale.