But what is earnest money, where does it go, and do you ever get it back?
What You Need to Know About Earnest Money Deposits
An earnest money deposit, commonly called a good faith deposit, is money you put down on a home to show a seller that you’re serious about buying. It’s not the same as your down payment; this is money that comes out of your pocket before you even obtain financing on the home. You include your earnest money with your purchase offer.
If you’re like most people, you need to know:
- How much an earnest money deposit costs
- Who holds your earnest money
- What happens to your earnest money deposit when you buy – or don’t buy – the home
How Much Does an Earnest Money Deposit Cost?
You can expect to spend between 3 and 5 percent of the home’s purchase price on an earnest money deposit. Let’s say you’re making an offer on a home that costs $100,000. Your earnest money deposit should generally be between $3,000 and $5,000.
The amount you put down as earnest money can – and will – vary based on the home you’re buying, how much the house costs, and even the neighborhood it’s in. When you find a home you love, talk to your Orlando Realtor® about how much you should put down as an earnest money deposit – he’ll be able to give you the guidance you need.
Who Holds an Earnest Money Deposit?
You never, ever give your earnest money deposit directly to the seller, even if you’re buying a For-Sale-By-Owner home. Instead, you give your Realtor a certified check or money order. Your agent will then give it to his or her broker, or the seller’s broker, who will put it in an escrow account that nobody can touch. The seller can’t access it, and neither can you. The money sits in escrow until closing day.
What Happens to Your Earnest Money Deposit When You Close on the Home?
When you close on the home, your earnest money deposit still belongs to you. The money you put down will be applied to your:
- Down payment
- Closing costs
- Other fees
- Mortgage payments
The money never goes to the seller. You only needed to kick out some of your own cash to show the seller you were serious about buying his or her home; that way, the seller could be comfortable taking the home off the market and preventing other buyers from making offers on it.
What Happens to Your Earnest Money Deposit if You Don’t Buy the Home?
In some cases, you can back out of a real estate transaction with your earnest money intact. However, in others, you’ll lose your earnest money deposit to the seller.
If your agent has built contingencies in your real estate purchase contract, such as a financing contingency, an appraisal contingency or an inspection contingency, and one of those provides an “out” for you to back out of the deal, you should be able to keep your earnest money. Your agent will ensure that it’s returned to you as quickly as possible.
Some ways you can get out of a real estate purchase contract because of a contingency include a low appraisal, bad results in a home inspection, or a failure to obtain financing within a certain time frame.
If you simply get “cold feet” and want to back out of the real estate transaction without a solid reason, the seller may be entitled to keep your earnest money deposit as compensation for having turned away other buyers who would likely have purchased the home.
The bottom line: Before you make an offer on a home and hand over your earnest money deposit, talk to your Realtor and be sure you’re making the right decision. You should be 100 percent invested in buying a home before you come up with an earnest money deposit.
Are You Buying a Home in Orlando?
If you’re thinking about buying a home in Orlando or any of the surrounding communities, we’d love to help you find something that’s just perfect for your needs.
Call us at 407-529-4621 or contact us online to tell us what you’re looking for. In the meantime, explore our:
- Homes for sale in Alaqua Country Club
- Homes for sale at Bay Hill Club
- Country Club of Orlando homes for sale
- Homes for sale at Keenes Pointe Golf Club
- Isleworth Country Club homes for sale
- Sweetwater Golf and Country Club homes for sale
- Homes for sale at Heathrow and Legacy Clubs