How Much Earnest Money Should I Put Down?

How Much Earnest Money Should I Put Down?
Sammamish Mortgage
Post Date: Updated:

Showing a buyer you are “in earnest” by depositing a sum of money is a practice dating back decades. But how much should you put down? If you’re wondering about how, when, and how much of earnest money, here’s what you need to know to complete this step in the home buying process.

What Is Earnest Money For?

Earnest money serves two functions: It tells the seller you are serious about your offer, and it covers some of the expenses associated with buying a home. You don’t give earnest money directly to the buyer; instead, you deposit it with a third party, who holds the money until the house sale closes, or one or the other party backs out of the deal.

How Much Earnest Money Is Reasonable?

Earnest money usually totals between 1% and 3% of the total home purchase price. For first-time homebuyers, earnest money may be lower, as some of the costs of homebuying may be absorbed by their specific loan program. In competitive markets, the seller might ask for more. Overall, if you are buying a $200,000 house, expect to cough up between $2,000 and $6,000 in earnest money

What Happens to the Earnest Money?

If the home sale concludes without incident, you get the earnest money back, and can apply it to closing costs or your down payment. If the seller walks away, you also get the money back. If you back out of the deal, and the reason you back out isn’t covered by a contingency clause in your offer, the seller gets to keep the earnest money.

If you feel you are certain about wanting to buy the home, you might up your earnest money to impress the seller. However, tying up a lot of funds in earnest money can put you at risk of losing it all if you have to cancel the sale for a non-contingent reason.

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