When you buy a home, one of the provisions of your purchase contract is something called the earnest money deposit. Earnest money is a deposit that a buyer makes at the beginning of a home purchase that shows that they are serious about the transaction.

The Facts about Earnest Money Deposits | fadukuvo.web.fc2.com

So, the big question when writing an offer on a home is how much should your earnest money deposit be? Earnest money demonstrates that the buyer does have funds readily available and they are willing to tie them up while they inspect the property and apply for their loan.

Second, earnest money provides a monetary consequence that a seller can easily utilize if the buyer backs out of the purchase for no reason. This protects the seller from monetary damages incurred when a buyer breaches the contract, and keeps the resolution of these damages out of the court system. Lastly, it does prevent buyers from playing games and bidding on lots of different homes at the same time, in hopes of cherry-picking the best one.

Earnest money should not be confused with your down payment. The down payment towards your house is the amount of cash that you need to contribute towards closing the transaction.

Earnest money is simply an initial deposit that is specified in the contract, usually much less than your entire down payment. If your home purchase closes, the earnest money deposit that you originally made will be applied towards your down payment. So how much earnest money should you put down?

There is no easy answer to this one, and deposits vary considerably depending on your local market and real estate customs. Remember, the earnest money deposit is not set and is to be negotiated between the buyer and seller.

Understanding the Earnest Money Deposit | fadukuvo.web.fc2.com®

Here are some recommendations when trying to determine the proper amount of earnest money. By signing a contract with you, they have to take the home off the market for days, and they want some assurance that you are going to do what you said you were going to do in the contract. That hardly shows that the buyer is serious or financially capable of buying the home.

That contract was ignored by the seller. A seller faces real economic consequences when a buyer backs out of a deal, and a serious buyer needs to be willing to show that they will risk some of their own money to compensate the seller if they get cold feet.

If you are competing with other offers, raising your earnest money is one frequently used method to entice the seller to accept your offer. You can use this same technique if you are offering a low price.

With some sellers, you may get them to accept a lower price if they have added assurance that you will close quickly, with minimal risk to them. Most times I advise buyers to make their earnest money high enough to be accepted, but not so high that they senselessly put extra money at risk. When a buyer loses their earnest money, in legal terms it is referred to as liquidated damages.

I am not a lawyer, and I am not familiar with the laws surrounding liquidated damages in each state, but many states have limits on the amount of liquidated damages that can be claimed in a real estate purchase.

You need to research what the limits are in your state, and you should definitely not be making earnest money deposits above these limits, as they become meaningless gestures. Real estate agents representing the seller have a habit of pressuring the buyer for more earnest money than necessary.

It is your money, and ultimately the final amount of earnest money is a negotiation between the buyer and seller, not their agents. Earnest money is probably the biggest reminder of how seriously real estate contracts need to be taken.

Understanding the Earnest Money Deposit | fadukuvo.web.fc2.com®

In the buyer backs out for legitimate reasons covered by one of these contingencies, the earnest money deposit will be returned to them. However, if you make it all the way to the end of a transaction and walk away for no legal reason, you will lose your earnest money, so you need to take the obligations spelled out in a real estate contract very seriously.

A buyer should put down enough earnest money to be taken seriously, but not a needlessly high amount, even if they have the cash available.

Local market customs and amounts vary tremendously in different cities and states, so ask your real estate professional what is typical for your market. Understanding the finance contingency in Washington state. What is Earnest Money? Waiving contingencies in your offer for a home.

Competing with another offer. Toggle search box Toggle menu. You are using an outdated browser. Please upgrade your browser to improve your experience. Blog Home Buying a Home Selling a Home Seattle Real Estate Ask an Agent Mortgage More Topics Ask an Agent Mortgage Owning a Home Real Estate Industry Awesome Home Features Hall of Shame Technology Sort by Topic Buying a Home Selling a Home Seattle Real Estate Trends Ask an Agent Mortgage Owning a Home.

How Much Earnest Money is Enough? Do Not Needlessly Put Large Amounts at Risk Most times I advise buyers to make their earnest money high enough to be accepted, but not so high that they senselessly put extra money at risk. Recognize the Risks Earnest money is probably the biggest reminder of how seriously real estate contracts need to be taken. Follow findwell to get more articles like this: Receive articles in Email Sign Up.

Visit Seattle Neightborhoods University-District. Your information has been sent and we will be in touch with you soon. Seattle Homes for Sale Bellevue Homes for Sale Bothell Homes for Sale Edmonds Homes for Sale Issaquah Homes for Sale Kenmore Homes for Sale Kirkland Homes for Sale Lynnwood Homes for Sale Mercer Island Homes for Sale Newcastle Homes for Sale Redmond Homes for Sale Sammamish Homes for Sale Shoreline Homes for Sale Renton Homes for Sale Washington Cities Woodinville Homes for Sale.