Dear Egghead: I’ve found the perfect house and am ready to submit a full-price offer. How much earnest money should I put down?
ANSWER: The customary amount is 1 percent to 3 percent of the purchase price. If your conviction is strong about this home, putting a bigger deposit would strengthen your offer. (For new construction, deposits are usually much larger, perhaps 10 percent).
The custom of earnest payments has a long history. In the Middle Ages, it was called “earnest penny” or “Gold’s silver,” intended to secure a bargain, perhaps for the purchase of a servant.
Why should you offer more than 3 percent on real estate? If you’re sure about the house, you want your offer to be as strong as possible. Putting a larger deposit down lets the seller know you’re a reliable transaction partner, and there’s a very high likelihood you’ll follow through on the purchase.
Earnest money protects the seller from flaky buyers who might back out of a deal without just cause. In exchange for the seller taking their home off the market, you put cash down to assure the seller that you will follow through to closing, or lose that deposit.
Here’s an example of a weaker offer: you have a financing contingency included with your offer — indicating that you might back out of the deal if you’re not approved for a mortgage — you can abandon the deal, but the seller keeps your earnest money. Without a financing contingency (or an inspection contingency) — and with a larger earnest money deposit — the seller gains confidence that your offer is solid.
It’s possible to successfully purchase a home with only a token earnest money deposit of less than 1 percent, but your offer must be compelling in other ways. For example, an offer without an inspection contingency, and without a contingency that you must sell your current home before closing. The ultimate offer is an all-cash offer with no contingencies — and failing that, a hefty earnest money deposit that shows that you are extremely motivated to follow through on the purchase, and that you have the means to do so.
If you’re sure about this purchase, offer a deposit of more than 3 percent. You’ll be that much closer to buying the house you want.
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