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!
June 7th, 2007 at 10:14 am
Great primer on Earnest Money. One thing to keep in mind, from the loan side, is that if the Earnest Money is more than 2% of the loan amount then certain programs require additional documentation to source and even season the funds.
Thanks,
Shailesh
June 7th, 2007 at 10:25 am
An excellent point! And another good question to ask your lender when discussing loan programs.
June 11th, 2007 at 10:33 pm
[...] you’ll write will be an Earnest money check. You can read more about Earnest money in this linked article. The amount you want to offer is up to you, but I’m going to recommend you put [...]
August 6th, 2008 at 12:45 pm
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