How much should you put down in the earnest money deposit?

The amount you'll pay for the earnest money deposit will depend on a few factors, such as policies and limitations in your state, the current real estate market, and what the seller requires. On average, however, you can expect to hand over 1-3% of the total purchase price as earnest money.

In some real estate markets you may end up putting down more or less than the average amount. In a real estate market where homes aren't selling quickly, the seller may only require 1% or less for the earnest money deposit. In markets where demand is high, the seller may ask for a higher deposit, perhaps as much as 2-3%. You can sometimes win a bid if you give the seller a large deposit. In fact, the seller may be willing to come down in price a little if you make a bigger deposit.

In California, for example, the maximum risk a buyer faces in an earnest money deposit transaction is three percent (3%) of a given property’s purchase price whether used or brand-new construction, under California Civil Code, section 1675.

However, you may wind up having to do some paperwork for your mortgage lender, and the bank may want to verify the source of the funds for larger deposits. It won't be a problem if you can show that you've had the money for at least 60 days.

When do you pay the earnest money, and who holds it?

In most cases, after your offer is accepted and you sign the purchase agreement, you give your earnest money deposit to the title company. In some states, the real estate broker holds the deposit.

The common-practice in California, for example, is for escrow companies, rather than the selling or listing agent, to hold a buyer’s earnest money deposit.

Always check the credentials of the firm or broker taking the deposit and verify that the funds will be held in escrow. Never give the earnest money to the seller; it could be difficult or impossible to get it back if something goes wrong.

After turning over the deposit, the funds are held in an escrow account until the home sale is in the final stages. Once everything is ready, the funds are released from escrow and applied to your down payment.

Can you get your earnest money back?

If the deal falls through, a small cancellation fee is usually taken out of the deposit, but the remainder remains in escrow. Whoever holds the deposit determines whether you should get the money back under the terms of the purchase agreement.

To be on the safe side, make sure the purchase agreement covers how a refund would be handled. Keep in mind that even if you are pre-approved for a mortgage loan, you can still be declined while your loan is in process if anything should change with your income, employment, credit, etc. In such cases, standard contracts allow you to recover your earnest money deposit due to not being able to obtain financing (assuming you haven’t signed off on the loan contingency). You can also usually get your money back if you find problems with the property.

When Does a Buyer Retain Their Earnest Money?

If a buyer doesn’t waive the contingencies in writing within the time period stated in the purchase agreement, then the listing agent must send the buyer’s agent a cancellation of the escrow, signed and dated by the seller.

Once the signed cancellation of escrow is returned to the listing agent, the earnest money deposit should be returned to the buyer and the contract will be deemed rescinded.

When Does a Buyer Forfeit Their Earnest Money?

If a buyer cannot close escrow, and has waived all contingencies for the purchase of property, an escrow cancellation and forfeiture of the earnest money deposit must be sent to the buyer’s agent.

This, in turn, must be signed and dated by the buyer and returned to the escrow office and listing agent. Once escrow is cancelled, then the earnest money deposit will be released to the seller and listing agent.

Reasons for the buyer being unable to close escrow can range from a buyer’s inability to get a loan for the purchase of property, to deciding that closing on a deal may not be in their best interest.

How to Handle, Hold, And Distribute Forfeited Earnest Money

It is advisable for a buyer to hold off from waiving contingencies, in writing (for the purchase of property), as long as possible. This is because once a buyer waives all contingencies, he or she risks losing their earnest money deposit if the escrow doesn’t close.

Only after the escrow is cancelled, will the seller receive the earnest money deposit.

There may also be a provision in the “Listing Agreement” or other Agreement/Addendum that the listing agent may be entitled to one-half (1/2) of the forfeited earnest money amount after escrow fees and other costs are paid for the cancelled escrow.

Check with your state’s real estate association for guidelines and state specific Listing Agreement documents.