Why Does Earnest Money Matter?


If you’re on the house hunt, you may have heard the term “earnest money” (EM) thrown around. Earnest money is a crucial part of any home purchase. Before I talk about why EM matters, lets first talk about what EM is.

Whenever an offer is submitted, a buyer will state that they will submit money to be held in a trust account by a third party, once the offer is accepted. This is known as Earnest Money. Earnest money can be seen as a deposit with the buyer’s offer that will eventually be applied to their down-payment. Typically, EM is between 3-5% of the purchase price. So on a $200,000 home a typical amount would be about $6,000 and on a $700,000 home, about $25,000 would make sense.

So why does EM matter? From the standpoint of a seller, EM is often seen as a sign of commitment and indicates a level of seriousness of the buyer. The higher the EM, the more serious the buyer. The reason sellers view higher earnest money as “higher commitment” is because EM is also used as collateral in the event the buyer defaults on any part of the contract. So the higher the EM, the more money the buyer has to lose to the seller, if they fail to abide by the contract and the law.

Earnest money is a factor that can often be used to sway the sellers to pick you in a multiple offer situation. While it rarely happens, buyers need to be aware that it is also money that could be lost.

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© 2015 by Cyrus Fiene, Coldwell Banker Bain