What is earnest money for? Earnest money does a couple things for first time home buyers. One, it’s a show of good faith to the seller that you have the financial capacity to purchase the property. Two, and more importantly it’s a remedy for default in case you decide to illegally breach the sales contract.
So it’s like a deposit? Yup, that’s another way to think about it. If a first time home buyer breaches the contract, the seller is going to be very inconvenienced by having to go back on the market and find another buyer. They may also be out a fair amount of money, so they just want to confirm that the buyer is serious about purchasing their home.
How much does earnest money have to be? It really depends, but a general rule of thumb is somewhere between 1-3% of the purchase price. For instance, somewhere between $2,000-6,000 for a $200,000 dollar home. Again, this is just an example as the amount can vary in each specific situation.
That’s a lot of money! We realize that this can be a large amount, especially for first time home buyers just starting out. Please keep in mind that like a deposit this money is credited towards the final purchase. So as long as you DO NOT breach contract and move forward to closing (which most buyers do) the earnest money will be credited towards your down payment amount.
But what if I decide I don’t want the house? There are also several protections in the contract that give you outs in certain instances, but we’ll save this for another blog. Before writing an offer and making a decision about earnest money, be sure to consult with your licensed real estate broker.
Don’t make the biggest decision of your life without getting educated! If you’d like to learn more about earnest money or the home buyer process in general, please go to our Calendar/Reservations page and sign up for one of our FREE First Time Home Buyer/Down Payment Assistance workshops.