Home Buying 101 - How Much Earnest Money Do I Need?

Every home buyer loves the process of visiting homes and finding that perfect place to call home. Sitting down and writing the offer is not always as much fun! For many people, the process of buying a home is something they go through only once or twice in a lifetime. New terms and questions come are the norm as the purchase agreement is prepared. As a Realtor in the northeast Twin Cities metro, whether I am working with first time buyers, move-up buyers or empty-nesters, one question always stops the process for a moment of discussion. How much earnest money are you prepared to offer?

The amount of the earnest money varies with each purchase agreement. A buyer must first understand the purpose of the earnest money to determine the right amount to include with the offer.

Earnest money is the funds that a buyer puts down to demonstrate to the seller their seriousness about buying a home. It should be an amount sufficient enough to indicate to the seller that the buyer will not walk away from the deal without good reason. In Minnesota this is traditionally 1% of the purchase price but it can be up more. A lower amount can also be acceptable with some offers. However it is important to be realistic.

A few years back, a potential buyer wanted to put down $100 earnest money on a $300,000 home I had listed. The seller was not impressed and felt it was an unreasonable amount as the buyer could easily walk away from the deal with only $100 at risk.

Generally the earnest money funds are in the form of a check. That money is deposited into the listing broker's trust fund or escrow account. In Minnesota, the funds must be deposited within 3 days of an offer having been accepted in writing. Yes, this does mean that the check will be cashed in 3 days or less!

If the offer is accepted, the earnest money will be applied to the down payment and/or the closing fees when the closing takes place. If your offer is not accepted the check is not cashed and the money will come back to you. However, if the offer is accepted and the check cashed and then for some reason all contingencies are not met or other situation arises where the sale does not proceed, the buyer does not automatically receive a refund of the earnest money. Nor, does the seller automatically keep the down payment. Buyer and seller must reach an agreement for the cancellation of the agreement and disbursement of the funds.