First, we would like to set the record straight on the definition of earnest money. Earnest Money in a real estate contract means exactly that…that the Buyer is in “Earnest” about purchasing the property. (For further information about the history of earnest money, click here). All contracts need something of value exchanged between the parties in order to be…well, a contract.
In real estate, the seller offers his property, the buyer offers money to purchase the property. Simple huh? The contract concludes with the property and money exchanged at a settlement (usually at a title company in Utah, other states may use attorneys). The money offered by the buyer at settlement usually consists of a down payment (31/2 to 20% of purchase price) and the balance in the form of a loan. Part of that down payment is….wait for it….the Earnest Money.
How does this differ from a deposit…
on an apartment you ask? Well, it differs in that the earnest money is actually a small down payment on the property and will be credited toward the total downpayment at closing. The buyer does not lose the earnest money or have to jump through hoopes to get it back (as with an apartment deposit…or any Other deposit you might make). There are, in fact, specific contingency sections in the Real Estate Purchase Contract that allow the return of your earnest money when a contract fails. ( Your Realtor will explain these to you before you sign the contract)
So, How Much Earnest Money Do I Need?
Now, after that rather long winded explanation, we come to the question at hand. How Much Earnest Money Do I Need?
Short Answer: It depends.
- If you are a first time homebuyer and purchasing under $250,000 (at least in Utah) $500-$1000 is acceptable. Remember the more earnest money you put down, the stronger your offer will be to the seller.
- If you are buyer that is moving up to the $300,000 price range, no Less than $1000.00 in earnest money is acceptable
- Any home with a purchase price over $400,000 should be 1% of the purchase price.
Just remember, earnest money is needed when you make the offer, so be prepared. If you have any questions, call, text or email us. We’d be glad to help. Oh, and if you would like to search for your new home, start here.