Reader question: “We are planning to buy a house in the 250k dollar range. How much earnest money should we pay for a home purchase in this price range? Does it vary based on the price of the house, or is it pretty standard across the board?”
Here’s the short answer. In a slow real estate market, where the seller isn’t getting very many offers, you might only have to pay $500 – $1,000 in earnest money. In a fast-moving market, where there is more demand for homes, you might have to make a bigger deposit, perhaps up to 2% or 3% of the offer amount.
So it varies based on (A) regional norms and (B) the level of home-buying activity. The asking price also plays a role. Higher-end properties tend to elicit bigger earnest-money checks.
What Is an Earnest Money Deposit?
I’ve given you a short answer above. Now let’s dig deeper into the subject of earnest money deposits. First of all, what does it even mean? The best way to understand this term is to break it down to the root words:
- Earnest — The dictionary defines this as being serious or sincere about something.
- Money — You know what this is.
- Deposit — A partial payment made for a purchase, with the remainder due later.
So let’s put these things together. What is an earnest money deposit? It is money paid toward the purchase of a home, to show the seller you are serious about buying the property.
Why Are They Needed?
Sellers have a lot on the line when selling their house. So they want to make sure buyers are serious when making an offer to buy. By putting some cash down toward the purchase, in the form of a deposit, you are showing them exactly that.
The bottom line: Earnest money deposits are meant to discourage buyers from making multiple offers on many different properties, just to “weigh their options.”
Think of it from the homeowner’s perspective. When a buyer and seller agree on a certain purchase price for a home, the property is usually taken off the market (formally or informally). When this happens, the seller stops accepting and considering offers from other potential buyers. Imagine if you were selling your house, and you took it off the market for a couple of weeks only to find out that the buyer had “played you” by doing the same thing with five other properties! Inconvenience is an understatement.
The earnest money deposit is a way for the buyer to say, “I am sincere about purchasing this home, and I’m not trying to waste your time.”
Without the earnest money being paid, a would-be home buyer could essentially take multiple homes off the market, by making multiple offers. This means that several of the homeowners are going through the motions for no reason whatsoever, and with no hope of a sale. These days, sellers rarely accept offers without deposits. So if you want yours to be accepted, you’ll have to pay earnest money to some degree. The question is, how much?
How Much Should You Pay When Buying a House?
Let’s revisit the question at hand: How much earnest money should you pay toward the purchase of a house? There are no hard-and-fast rules about these deposits. They vary from one housing market to the next, based on several factors. The activity level within the local market, and the price range of the property in question, have the biggest influence on earnest-money trends.
Some real estate agents say that 1% – 2% is a good rule of thumb, in most cases. In a slower market, where sale properties are sitting idle with very few offers, you might get by with an earnest money deposit of $500 – $1,000. In a higher-end market, and/or one with a lot of competition from other buyers, you might have to pay 2% – 3% of the offer amount. It varies.
If you’re working with a real estate agent, he/she should be able to tell you what the norm is for your area and price range. Ask your agent how much of an earnest money deposit you should pay, for the type of property you seek. Stick to the local norm as much as possible, to avoid losing the home to a stronger buyer / offer. If you try to make a deposit that is well below average for your area (and below what the homeowner is expecting), they might not take you seriously.
Remember, the deposit goes toward the purchase price if the deal goes through. So you don’t lose it unless you back out of the deal. That’s the whole point — to show the seller you’re sincere and earnest about purchasing the property. A seller’s worst fear is to take the home off the market after accepting an offer, only to have the buyer pull out at the last moment. It’s a real pain. Trust me … I’ve had it happen to me. The forfeited deposit compensates the seller for the inconvenience of this setback.