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How Much is Earnest Money?

June 5, 2007

It’s the second question I’m going to ask when we write an offer to buy a house, here in Tucson.  (The first question is how much do you want to offer, in case you were curious.)

How much earnest money do you want to put down?

This is where it begins to dawn on folks that they’re making a large decision to purchase a home: this is where you, the buyer, put your money where your mouth is.

Earnest Money is one signal to the Seller that you are serious about Buying their home.  It is money that you are giving to a neutral party to hold while you and the Seller decide if this is the right home for you or not.  It is consideration for the Seller, because they are taking their home off the market to deal exclusively with you.

Earnest Money is cashed as soon as you and the Seller can agree on the initial contract price and terms.  Whatever you offer as Earnest, it has to be funds that you have NOW, in your accounts.

I should mention that Earnest Money is NOT required by law, but I’ve never seen a Seller accept an offer without some sort of money as Earnest.

So how much is enough, without offering too much?

I’ve seen as little as $100 used as Earnest Money successfully, heading upwards to $50,000 and beyond.  In general, the more expensive the house, the more Earnest the Seller will want.

My general rule of thumb for Earnest Money is to offer 1-2% of the sales price.  In my experience, that amount is usually enough to satisfy the Seller, and the majority of home buyers can come up with that amount of cash.

There are exceptions, and special cases, of course.  One notable factor is to make sure you aren’t putting more down in Earnest Money than you will pay in Closing Costs and Down Payment combined.  You don’t want to overpay your down payment and closing costs with your Earnest deposit - and if you do, you’ll have to take a few extra steps to make sure you get any overage refunded back to you as cash at the closing table.

And as always, rules vary by state, so check with your local authority!  I only know Tucson real estate, but hey, I know it well!

Other Information That Might Be Helpful

• When You Can’t Just Throw Money At The Problem (July 21, 2008)

  Last week, we talked about buying a home with little or no money down.  Here’s another aspect we didn’t cover in that discussion, from a Seller’s perspective.
  Here’s the common scenario: let’s say you just accepted an offer and agreed to pay 3% in down payment and an additional 3% in closing costs to the Buyer.  [...]

• Buying a Tucson Home With Little Or No Money Down (July 15, 2008)

  Speaking of FHA loans… There are still Buyers out there purchasing homes with basically no money down - or very little money, anyway.
  You can do that with an FHA loan - a typical FHA loan is at 97% of value, or 97% LTV.  This means that the Buyer has to come up with [...]

• Down Payments and First Time Buyers (April 22, 2008)

  I sat down with a first time buyer the other day and we were going through my little buyer presentation and we got to the money section, talking about earnest money and closing costs and down payment - she stopped me and said that everyone is telling her that she shouldn’t have to put [...]

• What Does It Cost To Buy A Home? (October 22, 2007)

  When you buy a house in Tucson - or just about anywhere - there are lots of people that provide services to you, from the lender and the appraiser to the tile insurer and the guy that carries the documents down to the city to be recorded.  Naturally, all of these people want to [...]

• Here’s the thing… (May 27, 2008)

  Your home’s value isn’t determined - not even remotely - by the amount of money you want out of it.
  Let me back up a second here.  I’ve got a couple of excellent buyers, pre-qualed, solid borrowers, solid buyers.  So we find what seems like a perfect candidate home and make an offer.
  Except the Sellers have [...]

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