Earnest money is money given by a buyer to a seller as part of the purchase agreement to bind a transaction or assure payment.
Home buyers often offer earnest money to home sellers to show good faith and demonstrate that they are capable of completing the purchase. The money is deposited into an escrow account while the buyer obtains financing and completes the other terms of the purchase agreement. If the sale closes, the earnest money is credited toward the purchase price. If the sale is not completed, the earnest money is either refunded to the buyer or remitted to the seller, depending on the terms of the purchase and the reason the buyer fails to close.
When you are making a major purchase, part of the way you show the seller that you are serious is to make an earnest money deposit. Once you determine how much you would like to offer for the purchase, you should decide how much you are willing to put down as an earnest money deposit. If the seller agrees to the amount, it is a good indication that the purchase will take place.
It can be confusing to decide how much you want to put down as an earnest money deposit. You want the earnest money to be large enough for the seller to take your offer seriously, but you don’t want to get yourself in a financial jam, especially when you will have to make a down payment and pay closing costs. Some experts recommend making an earnest money deposit of 2 percent or less. But in competitive markets, a larger offer can capture a seller’s interest and help put your offer at the top of their list.