How Much Earnest Money Is Required?
There is really no definitive answer to this and expectations can be changed in different locations. Earnest money is the buyer's funds paid in advance that will go towards the down payment and/or closing costs of the real estate purchase. If a buyer follows everything necessary to obtain financing and is turned down, they are entitled to a refund of their earnest money.
Some areas have an unwritten expectation of a certain percentage of earnest money. As with anything else in a contract, this is a point of negotiation. Some of my buyers have most or all of their cash for the purchase in the equity of their current property. If this is the case a simple explanation along with the pre-approval letter can usually satisfy the seller who might want a higher amount than the buyer can currently get their hands on.
Another reason for low earnest money deposits is low or no down payment financing that is available. I've seen sellers (or their agents) expecting more earnest money than the buyer would need to bring to the closing. Once again, an explanation of the financing can make the sellers and their representatives understand the situation better.
On the other side, if I'm representing a seller I would like to see as high of an earnest money deposit as possible. This makes it a bit more difficult for a buyer to change their mind or just walk away without being turned down because of financing problems. Remember, a seller usually removes their property from the market when an accepted contract is attained. If a buyer simply walks away this seller has wasted valuable market time and possibly missed a good buyer.
A buyer also needs to consider if there might be multiple offers on the property they are interested in. Sometimes an offer at the same price but with higher earnest money will be chosen. So coming in with a low earnest money deposit might be the reason that you do not get your contract accepted.
As a buyer myself, I always come in with as high an earnest money amount as possible. I have no intention of backing out of a contract so I'm not worried about losing this money. I want my offer to look good and be as competitive as possible just in case another offer comes in.
I have received a lot of inquiries regarding earnest money on my site lately. Keep in mind, different areas have different expectations. Different states might also have different requirements.
If you have any questions or comments regarding this FAQ please Contact Me or give me a call at 480-906-1500.