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Four Common Earnest Money Questions Answered

three business professionals stand in a bright room and discuss common questions about earnest moneyFor those planning to take out a mortgage and purchase a home, homebuyers need to make what is called an earnest money deposit. First-time homebuyers typically have lots of questions concerning earnest money deposits: What is earnest money mean? Who is required to pay it? What is the average amount for an earnest money deposit? Who receives the money?

Keep reading to learn more about earnest money deposits and find the answers to these questions and more.

1. What Is An Earnest Money Deposit?

Earnest money is the deposit made by the homebuyer when making a purchase offer on a house. The purpose of this upfront payment is to show the seller that you are “earnest” or serious about purchasing their home. Once the seller signs the offer, accepting it, they can’t go back and change their minds or accept other offers. This deposit proves your good faith in buying the home and your desire to move forward with the deal. That’s why you may also hear it called a “good faith” deposit.

2. How Much Is The Average Deposit?

There is no standard amount or requirement for earnest money deposits but they can range from between 1%-5% of the purchase price. Ultimately this amount is decided between the buyer and seller. Some sellers request a certain amount, but the majority wait to see what the buyer offers. It’s crucial to remember, the earnest money deposit shows the seller how serious you are, and could impact your chances for success.

For example, if a seller receives multiple offers from buyers, a more substantial earnest money deposit could make your offer more appealing to the seller. This deposit is especially vital in competitive real estate markets such as the Bay Area.

If you want to learn more about average earnest money deposits, you’ll want to talk with local real estate professionals. They know what the standard is in your area.

3. What Happens To The Money If I Walk Away?

Most real estate purchase contracts have what are called “contingencies” written into them. These are unwavering deadlines that must be adhered to. For a homebuyer, a contingency allows you to withdraw from the contract under specific conditions and receive a full refund of the earnest money deposit. Contingencies can refer to home inspections, mortgage financing, and more.

For instance, the contract outlines a time when the homebuyer needs to have a home inspection done. If the inspection exposes major structural issues, and the buyer no longer wishes to purchase it, they can notify the seller in writing and receive a full refund of the earnest money.

These contingencies preserve the buyer’s earnest money deposit if anything comes up, and they need to withdraw from the contract. If the contract does not include contingencies, and the buyer wishes to back out, they could lose the earnest money.

If a buyer legally cancels a contract and the seller does not relinquish the funds, many real estate codes provide a legal channel to force the release. After the buyer notifies the escrow company to release the funds, the seller has 30 days to fill out the documents from the escrow agent, and they will be liable for a fine if they don’t.

Earnest money deposits are typically cut and dry, with very few disputes. As a homebuyer, it’s essential to understand how these deposits work. You’ll want to work closely with your real estate professional and mortgage lender to ensure the necessary contingencies are included in the purchase offer to protect your deposit.

4. Does The Earnest Money Go Toward The Purchase?

Yes! The earnest money deposit is just that, a deposit. The earnest money is an advance payment toward the purchase of your home. If there are no issues and your offer is accepted, the amount you paid for the deposit will go towards the down payment and closing costs.

 

You can reach out to one of our expert Client Advisors with any questions you may have about earnest money deposits or any other steps in the homebuying process. Our team is available 7 days a week by email at jvmteam@jvmlending.com or by phone at (855) 855-4491.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167