Thursday, 4th of March 2010 at 12:57:24 PMEarnest money is the amount of money a buyer submits with an offer to purchase a house. You actually write a check and send a copy with the purchase offer. Typically it’s a personal check.
Earnest money proves the buyer is ‘in earnest’, or serious about buying that house. If the seller accepts the offer, the earnest money is immediately deposited with the escrow/title office. Contributing to the funds needed to purchase the house.
HOW MUCH IS RIGHT?
A really common question I’m asked by buyers (especially first time buyers) is: How much earnest money is the right amount?
It’s really up to you, typically you will see it in the range of 1% to 2% of the purchase price and not less than $500.
RULE OF THUMB
One rule of thumb about earnest money is, put up as much earnest money as you can afford to lose if you change your mind. According to the contract Earnest money is forfeitable if the buyer is in breach. This means that if the buyer backs out of the purchase after the Due Diligence period, the seller has the right to keep the earnest money as compensation for the lost time on the market.
EXAMPLE
For example: Buyer looks at a house with an asking price of $399,900. Buyer makes an offer of $360,000. That $360,000 is made up of:
- $4,000 earnest money
- $32,000 cash down payment
- $324,000 to be financed by a mortgage
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