Earnest Money Depost - Why? Who? How Much?
January 29th, 2008 Categories: Alexandria Dirt, Arlington Dirt, First Time Buyers Club, McLean Dirt, Northern Virginia Home Buying, Real Estate 101, Reston Dirt
You’ve heard the term “good faith deposit” or “earnest money deposit” but what does it mean exactly? Who keeps it? What’s the purpose? Why does it matter? How much should it be? Let’s see if I can address all of these issues, bringing clarity to the importance of understanding the earnest money deposit.
What is it?
Here in Northern Virginia, when a buyer writes an offer on a property, our contract 
calls for it to be accompanied by an earnest money deposit of some amount – typically in the form of a personal check. This amount is usually a percent or two of the sales price… as a general rule of thumb. I’ve seen more - the higher the amount, the more seriously your offer is taken. This money belongs to the buyer, but it gets deposited prior to settlement usually with the real estate brokerage that is representing the buyer. However it is applied at settlement towards your closing costs or down payment.
Why do I need it?
The purpose of it is to show the seller that the buyer is serious about the purchase. It is the money that they are risking to lose should they default on the contract. Remember, I said “default.” If the buyer finds something with the home inspection or the association documents that they are unhappy about and can’t work out a solution, they can walk away under most circumstances and they will receive that earnest money back from the broker. However, if they walk away with no cause, or with no “out” from the contract — it’s default and they stand to lose that earnest money deposit and sometimes more. So it’s the money they’re putting forward in good faith indicating their intent to follow through on the contract.
Does it really matter how much I write it for?
From the seller’s perspective, if they received 2 contracts, one with a deposit of a few hundred dollars vs. another with one that was $10,000 - which do you think they’d consider to be stronger? Right, the one that’s higher indicating a higher degree of seriousness.
Now, it’s not all about earnest money - there are plenty of other factors that go into writing a good solid contract – but it is certainly a consideration that everyone should understand in order to be aware of the implications.
For professional guidance through the home buying process, give me a jingle! I’d be more than happy to help educate you on all of the ins and outs of good contract writing. Then, when you’re ready to move forward with your offer, you’ll be knowledgeable about the process and the process can move along smoothly!
Happy Tuesday!
Jennifer Klaussen
Serving all of your real estate needs in Arlington, McLean and the entire Northern Virginia Region!
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Hello Jennifer, great blog on the “Earnest Money Dilema”. Typically we suggest that our Buyers put as much down as possible as good faith. Some buyers don’t see why they need to put down so much money. We explain to them the importance of letting the Seller now you are serious. Keep up the great work.
David