Buying a new home is a long process, and during that process, an earnest money deposit must be made. If you’re a home buyer who is new to the real estate market, you may not have heard about earnest money before. Those who have heard of earnest money will sometimes have misconceptions about what it is and when it is used. Here’s what you need to know.

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

What Is Earnest Money?

Earnest money is a deposit that is made when a buyer’s home purchase offer is accepted. The earnest money check is written by the buyer and deposited in an escrow account, where it remains for the duration of the home buying process.

The purpose of earnest money is to show the homeowner that the buyer is committed to purchasing the property. In fact, earnest money serves as a kind of insurance. If the home buyer cancels the purchase offer outside of the contingencies written into the contract, then the buyer must forfeit the earnest money deposit.

How Much Is It?

Typically, home buyers put down between 1% and 5% for the earnest money deposit. The amount the home buyer puts down depends on how serious the buyer is, how much the house costs and whether the real estate market is very competitive.

Earnest money can be as little as $500 (or even less), but could go as high as $100,000 for a very expensive house. A typical deposit will be between 1% and 2% of the price of the house. A low earnest money deposit could be taken as an indication that the buyer is not serious about the purchase offer.

Home buyers who feel very seriously about their home purchase should put down a larger earnest money deposit to be on the safe side. What is considered a “large” earnest money deposit depends on the price of the house and the market. The home buyer’s real estate agent can walk the buyer through the process, and can help them decide how much to put down in earnest money.

What’s the Difference Between Earnest Money, the Down Payment and Closing Costs?

Earnest money is a deposit that is put down at the beginning of the home purchase process, as a show of good faith to the homeowner. The down payment is a large sum of money paid to the seller when the home purchase goes through. When the loan funds, earnest money is rolled over into the down payment, and the home buyer must write an additional check for the difference.

Home buyers closing costs are the legal and administrative fees that are paid at the end of the home buying process. The down payment is sometimes considered a part of the closing costs.

Want to Know More About Earnest Money? Talk to a Professional

Many things about the Carver MN home buying process can be confusing, including earnest money. If you’re a home buyer who has questions about earnest money, when it’s paid, how much is paid and other questions, contact a real estate agent. Your real estate professional can answer your questions and help you take the first steps to buying a home.

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