Earnest money is a way to show home sellers that you’re a serious buyer – but how does it do that, how much does it cost, and what happens to the money?
What is Earnest Money?
An earnest money deposit, which is also called a good faith deposit, is money you show the seller that signifies you’re serious about buying his or her home. You don’t actually give the money to the seller; instead, it sits in escrow until you close the deal.
Sellers are typically more likely to entertain an offer when it’s accompanied by an earnest money deposit. That’s because if you back out of the deal without a good reason, you’ll lose your deposit – and that shows the seller you’re seriously ready to buy. It gives sellers confidence about taking the home off the market and making it unavailable to other potential buyers.
How Much Does an Earnest Money Deposit Cost?
You can expect to spend between 2 and 5 percent of a home’s purchase price on an earnest money deposit. If you’re buying a $100,000 home, that means you need to come up with between $2,000 and $5,000 for earnest money. It’s usually around 3 percent, but your Grand Junction Realtor® will help you figure out an appropriate amount.
What Happens to Earnest Money Deposits?
If you go through with the transaction, your earnest money will be applied to your down payment, your closing costs, or your mortgage. If you back out of the transaction and you don’t have a contingency in your real estate purchase contract allowing you to do so, you’ll forfeit your money to the seller (who can then put the house back on the market while keeping your cash).
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