What Is a Good Earnest Money Amount?

When you buy a home, you often make an earnest money deposit. This is money you put into escrow after your offer is accepted. If a mortgage is used to purchase the property, the money is held in escrow until the home loan gets to closing.

Your earnest money deposit shows you are serious about buying the home, as the seller typically gets to keep the money if you walk away from the purchase without justification. There's no required minimum deposit, and you should determine how much earnest money to put down based on how much cash you have available and can put at risk, and what you believe the seller expects.

How Much Earnest Money Should You Put Down?

While you usually need earnest money to buy a home, the amount can vary widely. In many cases, an earnest money deposit is between 1% and 3% of the home's purchase price. However, in a competitive market, buyers may put down earnest money deposits as high as 5% or more.

These are common ranges, not requirements, and your REALTOR® can help you determine your optimal earnest money deposit for your offer. The table below shows the potential amount of your earnest money deposit depending on your home's purchase price.

Factors That Impact Earnest Money Amounts

Here are some of the key factors that affect your earnest money deposit.

Home Purchase Price

Earnest money is commonly calculated as a percentage of the purchase price. As a result, higher-priced homes generally require larger-dollar deposits.

Local Market Conditions

When you make an offer on a house in a competitive market, you may decide to make a higher earnest money deposit to make your offer more competitive.

Seller Expectations

Sellers often prefer higher deposits to provide them with more protection, as a larger deposit is typically seen as a stronger sign of commitment. While a high deposit isn't always needed to secure a home, if you don't meet seller expectations, they may be less likely to accept your offer.

Financing

The type of mortgage you're using, your lender's requirements, and your available funds may affect how much you're comfortable depositing as your earnest money. For example, if you are making a larger than typical down payment, you may not have a large amount of money to use for your earnest money deposit.

Higher vs. Lower Earnest Money Considerations

Here are a few key considerations that can affect whether you make a high or low earnest money deposit.

• Homebuying budget: Consider your homebuying budget, including the amount of your down payment, your closing costs, your moving expenses, and your cash reserves before deciding on how much to offer. A home affordability calculator can help you decide how much to put down as earnest money.
• Your level of interest: If a home is highly desirable and it feels like your dream home, you may decide to offer a larger earnest money deposit to make your offer stand out.
• Market conditions: Consider whether it is a buyer's or seller's market when deciding how much to put down. If it is a seller's market, you may need a larger earnest money deposit to make a competitive offer.
• When earnest money is due: While the timing can vary, earnest money is usually paid shortly after the seller accepts the offer rather than at closing, so you must ensure the funds are readily available when making an offer on a home.
• How earnest money is paid: Earnest money is usually held in an escrow account by a neutral third party, such as a title company, until closing or contract termination. This means you can count on your money being safe until closing.
• Earnest money contingencies: Financing, inspection, and appraisal contingencies can help protect you from losing your deposit if certain conditions are not met. Including homebuying contingencies in your purchase agreement allows you to make a larger earnest money deposit with less risk.

Common Mistakes When Determining Earnest Money Percentage

Here are some common mistakes when deciding how much your earnest money deposit should be.

• Offering too little in a competitive market
• Offering more than you can comfortably afford
• Waiving financing or appraisal contingencies without understanding the risk
• Missing contractual deadlines that could cause you to lose your earnest money
• Not considering the financial impact if the deal falls through and your deposit is forfeited

Avoiding these errors can help you avoid losing out on a home you are interested in.

Earnest Money Amount FAQs

Still need to know more? Here are the answers to some frequently asked questions about earnest money deposits.

Does Earnest Money Count Toward My Down Payment?

When you make a good faith deposit, your earnest money is generally credited toward your down payment or other closing costs at closing. If you are making a $100,000 down payment and you make a $20,000 earnest money deposit, the $20,000 is credited to you, so you only need an additional $80,000 for your down payment at closing.

When Is Earnest Money Paid?

Earnest money is generally paid shortly after the purchase agreement is signed and accepted, rather than at closing. This means the timeline for paying your earnest money deposit is often relatively short after your offer is accepted.

How Much Is Earnest Money On a $400,000 House?

There is no required earnest money amount for a $400,000 house. Borrowers commonly deposit 1% to 3% of the home's purchase price with an offer, though in competitive markets it can be 5% or more. If you make a 1% earnest money deposit, you would need to put $4,000 into escrow. If you make a 5% deposit, you would need $20,000.

Final Thoughts: Budget For Your Earnest Money Deposit

While there's no universally "best" earnest money deposit, it's important to budget for earnest money when you are buying a home. A larger earnest money deposit can strengthen your offer, but you don't want to put down too much and compromise your financial goals.

Prequalification also strengthens your offer when shopping for a home. Reach out to Freedom Mortgage today to get prequalified for a home loan so you can move forward on your homebuying journey.