Updated: Mar 29
Learn more about the ins and outs of earnest money right here.
Earnest money is one topic that often seems to be misunderstood and overlooked. What is it, how is it used, and how can it help buyers and sellers? Today we’ll be answering these questions and more.
Also known as consideration, earnest money is when—after going under contract—you write a check to the title/escrow company to essentially secure the property. The money is then applied to your down payment at closing. In the Denver Metro area, earnest money deposits are typically 1% for properties priced below $750,000. Above this, we usually see somewhere between 2% to 4%, and luxury properties may go as high as 5% to 10%.
For buyers, earnest money can be a great tool that helps guarantee you get your dream home. The money is protected throughout the sale with dates, deadlines, and conditions. For example, if you don’t like an HOA, you can back out and still receive your earnest money deposit. The same is true for inspection disputes, low appraisals, unfavorable terms, and denied loans.
You can always get the money back if the deal falls through.
This may sound like sellers aren’t getting much of a deal, but they are also protected. After the deadlines are reached, earnest money is considered “hard,” which means it’s no longer refundable.
If you’re a buyer in a competitive market, it can be smart to offer more earnest money than usual. Let’s say you’re paying 1%, or $10,000, on a $1 million property. If your down payment is 20%, you may be comfortable paying a higher percentage of earnest money—you can always get the money back if the deal falls through. If it’s very competitive, you may even make your earnest money hard as soon as your offer is accepted.
One final note: Even though VA buyers can put nothing down, they still need an earnest money deposit. The seller may be asking for $10,000 in earnest money, but you might not have it. However, you might already be approved to buy the property, and you might have $5,000 that you can pay. You can use that, get it refunded at closing, then complete your loan with 100% financing. We can also do what’s called an earnest money promissory note.
If you have any questions or would like more information about earnest money or any other real estate topic, feel free to reach out to me. I look forward to hearing from you soon.