What is an Earnest Money Deposit?

When placing an offer on a house, it is more than likely required that you write a check for an Earnest Money Deposit. An earnest money deposit lets the sellers know you are serious about your offer and that you are able and willing to back up your offer. Sometimes an earnest money deposit is interchangeably referred to as a good faith deposit. The earnest money deposit can be in the form of a personal check, money order or cashier's check.

There are certain standards to go buy when giving an earnest money deposit. First, the check should never be made out to a person. It should be made out to the real estate company or broker. Your check is refundable if the seller and buyer cannot agree on a deal. If the buyer is the one backing out of the deal, after a seller already agrees to the terms, then the buyer may not get their earnest money deposit returned. If the seller is the one not holding up their end of the deal, that the buyer will get the money back.

There are no set rules as to the amount the deposit should be. Depending on the market and the area of the country you are looking in, you can make an earnest money deposit of 2%-10%. You'll want to put down as little as possible because that money is going to be tied up during the entire offer process and if there are any glitches, that money is just sitting in some account, not doing anything for you. You should set up stipulations as to when the money could be returned, such as a failed home inspection or problems with any documents or paper work such as the title. I have placed a bid on three different houses in the past year, working with three different real estate agents. The houses I was bidding on ranged from $85,000 - $125,000 and each time I was asked to place an earnest money deposit of $1,000.00. The first two deals did not go through, and I was returned my $1,000 in full. I am still in the process of trying to work out a deal on the third house.

Once the check is written out and the offer is accepted by the seller, the money is held in an escrow or trust account until the closing takes place. From there the earnest money deposit is either applied to closing costs or as a down payment on the mortgage.