What Is Earnest Money and How Much is Enough to Put Down on a Home?

Sellers need to know if you are serious about buying their home. Earnest money is a good faith deposit that demonstrates to the sellers that you are serious about purchasing their home. This deposit can, and probably will be, forfeited if you walk away from purchasing the property.

What is a standard earnest money deposit? There is no set amount, but 1% to 3% of the agreed upon sale price of the home is typical. The amount varies depending on local customs.

Here are a few precautions you should take to protect your earnest money:

• Never give an earnest money deposit to the seller – not even if you’re buying a home that is for sale by owner (FSBO).
• Make the deposit payable to a reputable legal firm, escrow company, title company, or well-known real estate brokerage.
• Verify that your deposit will be put into a separately maintained trust account, and only dispersed according to the terms of the real estate contract.
• Never authorize a release of your earnest money until the purchase transaction closes.

Is your earnest money refundable if you cancel the contract?  Laws vary from state to state, so be sure to read and understand your contract before signing it. Some states have a grace period during which you can cancel the contract. If cancelled, both parties must sign mutual release statements before your earnest money is refunded.