You’ve found the house you’ve decided you’re committed to buying. To show the seller that you are serious about your offer, you decide to put down an earnest money deposit. How do you know how much you should put down and what determines the rate? There is no “right” answer, as it depends on a variety of factors:
What are the Policies in Your State?
According to the Missouri Bar Consumer Law Resource Guide, before you make your deposit of earnest money, you must get the following information:
- How long has the house been on the market?
- Is the price within your borrowing capacity, as pre-approved by your bank?
- Has the seller disclosed all known problems with the home?
- Does the real estate contract meet your objectives and account for contingencies?
By getting this information you can determine what amount is a fair and affordable for you to put down.
What is the Housing Market Like?
One factor of how much you may have to put down in earnest money is how well the housing market is doing. For example, if homes aren’t selling quickly, then sellers may request a deposit of 1 percent or less. On the flip side, if there is a high demand for houses, you may have to put down a higher deposit of 2-3 percent to remain competitive with other offers.
Regardless of how the housing market is, a typical deposit is 1-2 percent of the home purchase price. If the home has been on the market for a while and the sellers are eager to sell, then you may be able to negotiate a lower deposit.
How Much Can You Afford?
When you go through the steps of getting pre-approved and making your home offer stand out, lenders and sellers will be looking at how much you can realistically afford. If you need down payment assistance, you will need to negotiate with the seller the amount of earnest money to put down since that amount will be going towards your down payment and closing costs.
Make Sure You Have a Refund Agreement
When you make a purchase agreement with the seller, make sure that you and the seller agree on how your deposit of earnest money will be handled if the deal falls through. When putting down earnest money, don’t ignore or waive your contingency rights—even if they do make you a more attractive buyer. If something falls through and you waive these rights, then you won’t get your deposit back.
The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.