How Does an Earnest Money Deposit Work?

An earnest money deposit is the amount of money you are expected to bring to the table when you sign a real estate purchase and sales contract. The earnest money is to signify to the seller that you are going to make an earnest effort to purchase the property. The deposit is held in trust throughout the closing process. It is one way to differentiate the serious buyers from the non-serious ones. In hot real estate markets, the seller can use a request for a higher earnest deposit to determine who eventually gets to buy the house.

Depending on the area and the price of the house, a few thousand dollars or 3 percent of the purchase price is commonly asked for as an earnest money deposit. For example when buying a $150,000 house, you may be asked for anything between $2,000 and $5,000 as an earnest money deposit. It is important to note that there are no hard and fast rules and the exact amount can be negotiated between the buyer and the seller.

The process of actually closing on a real estate transaction after signing a purchase and sales contract takes at least 30 days while financing, appraisal and inspection details are worked out. The earnest money deposit being held in trust is then brought to closing to be used toward the purchase of the property.

What happens if the deal goes bad and the transaction is not closed? The seller does not automatically get to keep the deposit and the buyer does not automatically get it back. State law in some cases may come into play. But typically, what should happen to the deposit is agreed upon ahead of time and written into the purchase contract. Some middle ground is usually reached where some penalties and fees are deducted. In extreme cases the earnest money could be non-refundable.