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What Is Earnest Money In Real Estate?

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Published on September 30, 2021
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If you’re ready to put in an offer on a house, making an earnest money deposit is one way to show the seller that you’re a serious home buyer. But how much do you need for an earnest money deposit, and how can you ensure your earnest money is credited properly when you close on the house?

Let’s take a closer look at what earnest money is, how it works and how it compares to a good faith deposit.

How Much Do I Need For An Earnest Money Deposit?

The amount you need for an earnest money deposit is calculated by a fixed amount or percentage, depending on what market you’re in.

Fixed amount: In certain markets, there’s a fixed amount that’s a standard earnest money deposit, say $5,000, regardless of the purchase price. This is the amount that you would submit after the purchase agreement is accepted.

Percentage: In other markets, common practice will be to have the earnest money tied to a certain percentage of the purchase price. For example, if the standard deposit in your area is 3%, the deposit would be $6,000 on a home with a $200,000 purchase price.

If you’re working with a real estate agent or other market professional, they can tell you what you can expect to pay as an earnest money deposit in your area. Remember that, once deposited into an escrow account, your earnest money will earn interest. Meet with your accountant to retrieve the interest earned if it’s greater than $600.

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How Do I Ensure My Earnest Money Is Refundable?

If you make it to closing and get the keys, your earnest money is applied as a credit toward your down payment and closing costs. It’s often held in an escrow account until you close.

If you don’t end up closing on the mortgage, you can potentially end up losing your deposit. However, there are also certain ways to increase your odds of getting it back.

Common Earnest Money Contingencies

The only way to guarantee you’ll get your earnest money deposit back from escrow under a given scenario is to have a contingency in your purchase agreement. There are several types of contingencies you can use to try and protect your deposit:

  • Home inspection contingency: You can write into your purchase agreement that you get your deposit back if something specific comes up in the home inspection. The home inspection contingency clause is generally limited to major issues like a home needing a new roof or an HVAC system.
  • Appraisal contingency: An appraisal contingency gets you your deposit back if the home doesn’t appraise for the purchase price, which is important because the lender can’t give you more than the house is worth. It may not get this far, as sellers may be willing to go back to the negotiation table with you at this point to make the transaction workable, though that’s not always the case.
  • Mortgage contingency: If you had a mortgage contingency, also called a financing contingency, included in your agreement, you can get your deposit back if your mortgage financing falls through.
  • Existing home sale contingency: If you’re trying to sell your current home while buying your new one, you may negotiate to have the purchase contingent on the sale of your prior home so that you don’t have to make two mortgage payments.

Purchase agreements are negotiations. A seller may not agree to every contingency in many cases. Sellers who are particularly motivated to sell their home may balk at someone asking for too many contingencies in the purchase agreement, but it’s understandable to want some protection. You should be aware of the terms of your purchase agreement so that you know when you can and can’t get your money back.

What Is A Good Faith Deposit?

The term “good faith deposit” is sometimes used interchangeably with “earnest money deposit.” While earnest money is indirectly given to the sellers, a good faith deposit is paid to the lender with the same intent – to illustrate a commitment to move forward in the mortgage process.

Just like your earnest money deposit, if you close on your home, the good faith deposit goes toward covering your closing costs. Lenders use your good faith deposit to pay for things like appraisals, credit checks and other costs associated with processing your loan, including underwriting and reviewing your documentation, along with contacting insurance and title companies.

How Much Do You Need For A Good Faith Deposit?

If the term “good faith deposit” is being used synonymously with “earnest money deposit,” how much you need to pay is covered in the earnest money sections above. However, when referring to a good faith deposit to a lender, the amount of the fee is going to vary based on their policies.

At Rocket Mortgage®, a good faith deposit ranges from $400 – $750. The reasons for the range are that certain services like home appraisals and surveys (if a survey is necessary) vary in cost, depending on the market. You’ll get a deposit agreement that breaks down the actual cost of your deposit and explains in detail what the money is used for.

How To Protect Your Earnest Money Deposit

If you’re giving earnest money, there are some actions beyond contingencies that you can take to protect it and ensure that it either gets used for its intended purpose on your closing costs or can be refunded when the appropriate contingency is triggered.

Never give earnest money directly to the seller. You always want to give it to a third party. The best option is to have the title company put it in an escrow account. Make sure you get a receipt for this transaction.

Unlike an earnest money deposit, a lender’s good faith deposit usually isn’t fully refundable. However, Rocket Mortgage will refund any portion of the deposit that hasn’t already been used to work on your loan in the event that the transaction doesn’t close.

The Bottom Line

The home buying process involves a large financial transaction and can certainly be a complex journey with many checkpoints along the way. Having a better understanding of what earnest money is and how it works should help give you the confidence you need to move forward with purchasing your new home.

If you’re ready to buy a home, the first step is to get preapproved for a mortgage. You can apply online with Rocket Mortgage and get started today. You can also give us a call at (833) 230-4553.

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.