Prospective first-time home buyers may need to set aside a significant sum of money when going into contract on a home. Buyers should be ready to pay an earnest money deposit if they are serious about buying a specific home. Understand more about the earnest money deposit and how it may be applied to closing costs and more.

For informational purposes only. Always consult with a licensed real estate professional before proceeding with any real estate transaction.

What Is an Earnest Money Deposit?

A seller receives an earnest money deposit, or good faith money, from a buyer to demonstrate their interest in buying a home. Generally, this deposit is delivered when the purchase agreement or property appraisal is signed. However, it may be attached to an offer. These funds are not immediately accessible to the seller. Rather, the earnest money deposit is held in an escrow account. When the buyer closes on a home, the funds can then be used toward the down payment or closing costs.

Buyers benefit from an earnest money deposit (EMD). While the money is held in the account, a buyer gets the time they need to perform a title search, property appraisal and ensure financing. As both parties enter into a contract, the seller will not consider other offers, taking the property off the market during the period in which a buyer has it appraised and inspected.

When Might an Earnest Money Deposit Be Returned?

Signing a contract does not obligate parties to go through with the sale of a home. In fact, there are a number of home buying contract contingencies that must often be met to close on a home. After the inspection, a buyer may discover problems in a home that may cause them to lose interest in the property. Serious defects are a reason for an earnest money deposit to be returned to the buyer. The deposit will also be returned if a seller chooses to terminate the deal.

When Could a Buyer Lose an Earnest Money Deposit?

Sellers are not always obligated to return a deposit. If a buyer decides not to purchase the home, fails to meet certain contingencies, or cannot perform specific activities during their designated timelines, a seller can keep the earnest money. Selling a home is a time-consuming process. A seller may lose out on other offers during this period and have to list and market their home once again if a selected buyer does not go through with buying their home.

How Much Is Paid in Earnest Money?

No set amount is required. State laws and customs may work to dictate the size of the deposit. An earnest money deposit may be negotiated. However, a buyer will often pay an amount that falls within 1 and 2 percent of the purchase price of a home. A single percentage point can make a big difference, as 1 percent of a $500,000 is $5,000, but 2 percent on that same home will be $10,000. There are a number of factors that may impact the size of this deposit, including:

• Local market rates;
• Amount of buyer in interest; and
• How quickly a buyer may close.

The size of the deposit can be significantly larger in hot housing markets. It may be worthwhile to speak with a local agent to learn more about the general range for an earnest money deposit is a specific area.

Show Your Intent with an Earnest Money Deposit

Serious Franklin TN home buyers are prepared to pay an earnest money deposit, in addition to other fees and costs when going into contract on a home. However, an earnest money deposit creates certain expectations for sellers and buyers, enabling a smoother home buying process.

For informational purposes only. Always consult with a licensed real estate professional before proceeding with any real estate transaction.