You may have heard the term “earnest money deposit”, or at least something close to it. As a homebuyer, what does it mean for you? And do you need to be worried about it?
Just like it sounds, an earnest money deposit is a cash deposit on a home that you want to purchase. It shows the seller that you’re serious about buying the home and are happy to end your search.
It’s relative to the price of the home
There are no rules saying how much the deposit needs to be, but it’s typically a small percentage of the overall cost of the home. The amount will depend on your local real estate market, but it tends to be around 1-2% on average. It’s not unusual for this number to go up to 3% in some larger cities, but I’ve typically seen 1-2% in Durant, OK. It’s up to you and the seller to agree on a number that best suits you both.
You can (and should) make it conditional
1-2% is not a small amount, and it’s likely a portion of your hard-earned down payment. You want to make sure you’re covered under contract and able to receive a refund of the amount if the sale is canceled for any reason e.g. your financing falls through, the seller backs out, or a home inspection goes awry, a contract will have you covered. It can be tempting to offer a non-refundable deposit on your dream home, but you never know what will happen in the closing process. If the seller isn’t happy with placing conditions on the deposit, consider offering a much smaller non-refundable fee instead.
The money remains in escrow
When you’re offering an earnest money deposit, it means you’re serious about buying the home and don’t want to look at any others. However, that doesn’t mean you’re giving up a portion of your precious savings too early. The deposit you offer will remain in escrow until the sale is finalized and all conditions have been met. Afterwards, that amount is typically taken as a portion of your down payment. If a seller asks you to give them cash directly, don’t do it. Talk to your real estate agent about the best way to secure your earnest money deposit.
You don’t always need one
Depending on the real estate market in your city, you may or may not need to make a deposit. Earnest money deposits are seen more often in hot markets where sellers want to be sure you’re not placing offers on multiple homes. However, even in a subdued market, they can help close the sale of a home where a seller is motivated to sell quickly. Another case in which I encourage an earnest money deposit is when a buyer falls absolutely in love with a home. If you find a home that is “the one” and are comfortable parting with 1-2% up front, I say offer an earnest money deposit!
If you’re still unsure about whether you should offer an earnest money deposit, let’s set up a time to chat.