What is Earnest Money?

What is Earnest money?  It's in the name.  Earnest money is money is a way a buyer can show their good faith to the seller.  The funds can help separate your offer from the rest.

Before we get too deep in to the benefits of the earnest money deposit, it's important to understand that if a buyer fulfills their end of the contract, the earnest money goes back to them at closing.  This money usually goes towards closing costs and/or the down payment.

Benefits for the Buyer
When making an offer on a house that has other interested parties, a sold earnest money deposit can separate you from the rest as long as it's paired with a competitive offer. 

Similarly, when making an offer on a house with no competition, a significant earnest money check can set the stage for a cooperative seller.  The earnest money check shows the seller that the buyer is serious about the house.  Furthermore, it can help win more concessions from the seller further down the road. 

Benefits for the Seller
Effectively, earnest money makes the buyer "put their money where their mouth is."  Without this money on the table, buyers would be more likely to loose interest and simply walk away from the contract at a whim. 

Keep in mind that their are built in ways for the buyer to leave the contract without sacrificing their earnest money deposit; a few ways include: an appraisal for less than purchase price, inability to secure financing, and inability to negotiate the home inspection. 

How Much Should I Put Down?
There are no official guidelines or laws for the amount of earnest money.  Speak with your Realtor about what is common in your area.  Around the Harrisonburg/Rockingham area,  $500-$2,000 is fairly standard.  Other rules of thumb are 1%-3% of the contract price.  In some more competitive areas, earnest money can be even be higher.  

​Protecting your Earnest Money
When providing earnest money, it is best practices to not pay cash.  Make sure that the check will be held in an Escrow account until settlement. 

Discuss contingencies with your realtor to ensure your money is protected in the contract. 

1. Contingent upon the house appraising at or above purchase price. 
2. Contingent upon home inspection
3. Contingent upon securing financing
4. Contingent upon a current home selling