You typically present a cashier's check or personal check for an earnest money deposit when you make a purchase offer on a home. This deposit shows the seller that you're a serious buyer. The deposit is meant to prevent you from making offers on multiple homes, because you can lose the money if you renege on your agreement.
State law and local customs vary, but you'll typically make out a check to the escrow company or title company. Sometimes buyers transfer the deposit to escrow by wire or even credit card. When the sale closes, the earnest money goes toward your down payment.
The Size of the Deposit
The amount of your deposit depends on the cost of the home, state law and the real estate market. A deposit is usually approximately 1 to 2 percent of the purchase price, according to Realtor.com. In a slow market, 1 percent may be sufficient. That's $2,000 on a $200,000 home. In a highly competitive market, you might have to deposit as much as 3 percent, or $6,000, on the same home.
A large deposit may help convince the seller to accept your offer or even get you a reduction on the sales price, according to Realtor.com.
Whatever the amount, the earnest money is tied up for the escrow period and at risk if you decide to back out.
If the Sale Falls Through
If the sale doesn't work out because of a failure to meet some contingency, the buyer normally receives a refund. For example, your contract may be contingent on your obtaining a mortgage or selling your current home within a certain period.
If the seller doesn't make improvements required in the contract or the property doesn't pass a critical inspection, the buyer may also have the right to back out and get the earnest money back, according to Bankrate's Steve McLinden. On the other hand, if the sale doesn't go through because the buyer reneges, the deposit usually goes to the seller.
No matter who is responsible for a sale not closing, expenses can be deducted from the earnest money before the buyer or seller receives it.
Protecting Your Deposit
To safeguard your earnest money, the deposit should not go directly to the seller, according to Zillow. It should be deposited in an escrow account.
Defects in the Property
Depending on state law, the seller must disclose defects either with the offer to sell or just after accepting your offer. You should read and understand the seller's disclosures thoroughly, Zillow recommends. Ask questions about anything you don't understand. Once you've signed your acceptance of the disclosures, you can't use the defects to cancel the sale and get your deposit back.
Contingencies in the Agreement
Put contingencies in the sales contract to protect your deposit, such as making the sale contingent on an inspection, Zillow recommends. At a minimum, insist that an inspector check the appliances and wiring on a new home. An older house may require a thorough inspection, including the foundation, roof, electrical systems, heat, air conditioning and plumbing. If the inspection reveals something you can't accept, you should be able to get your deposit back, according to Brendon Desimone at Zillow.
Redfin recommends talking to a real estate attorney to find out for certain what contingencies will allow you to cancel without losing your deposit.