First-time home buyers in Washington State tend to have a lot of questions when it comes to earnest money deposits: What is earnest money, exactly? Am I required to pay it? What is the average size of an earnest money deposit in Washington State? Where does the money go? Below, you’ll find answers to these and other questions on the subject.
What Is Earnest Money?
Earnest money is a deposit the home buyer puts down when making an offer to purchase a home. The purpose is to show the seller that you are earnest (an old-fashioned word for “serious”) about buying their house. The earnest money deposit demonstrates your good faith in purchasing the home and your intent to move the deal forward. Hence, it is also referred to as a “good faith” deposit.
How Much Is the Average Deposit in Washington State?
There is no standard requirement amount for earnest money deposits in Washington State. It’s really up to the seller and the buyer. With that being said, the deposit sends a strong signal to the seller, so it could affect your chances for success.
For example, in a scenario where there are multiple offers from buyers, a stronger earnest money deposit could make your offer more attractive to the seller. This kind of thing is especially important in hot real estate markets like Seattle, where there is stiff competition.
In Washington State, home buyers generally make an earnest money deposit of 1% to 3% of the sale price. But you’ll want to rely on your real estate agent’s advice here. They’ll know what the “norm” is for your particular area.
The bottom line: When it comes to the amount of earnest money, adhere to local norms. If you make a smaller-than-average deposit, the seller might thing you’re not serious about buying their home.
What Happens to the Money if I Back Out?
Most real estate purchase agreements have contingencies written into them. From a home buyer’s perspective, a contingency is something that allows you to back out of the contract under certain conditions. For instance, there are contingencies relating to home inspections, mortgage financing, and more.
These contingencies protect your earnest money in the event that you back out of the contract. If you were to back out of the contract without having a contingency in place, you might end up forfeiting your earnest money to the seller.
According to Washington State law: “If a holder [i.e., title company or real estate brokerage] receives a written demand from a party to a transaction for all or any part of the earnest money held by the holder in relation to that transaction, the holder must, within fifteen days of receipt of the written demand: (a) Notify all other parties to the transaction of the demand in writing and comply with the other requirements of this section; (b) release the earnest money to one or more of the parties; or (c) commence an interpleader action.”
Earnest money disputes are rare, but they can occur. As a home buyer, it’s important that you understand how these deposits work, and that you include the necessary contingencies within your purchase contract to protect your earnest money. Again, you can turn to your real estate agent for advice on this. Your agent should be very familiar with this process.
Does the Money Go Toward the Purchase?
It’s called an earnest money “deposit” because it’s basically an advance payment toward your home purchase. So, if all goes well and your offer is accepted by the seller, the amount you paid in earnest money will go toward the down payment and closing costs (in most cases). So it becomes part of your real estate investment.
Need a Home Loan in Washington State?
Do you play to buy a home in Washington State sometime soon? Will you need mortgage financing to complete your purchase? If so, we can help.
Sammamish Mortgage has been serving home buyers across the state for more than 20 years. We are a family-owned company based in Bellevue, Washington. Our pricing and business model allows us to offer highly competitive rates. Please contact us if you would like to receive a rate quote for a home loan, or if you’d like to get pre-approved.