What is an earnest money deposit?

When you are in the market to purchase a home, you may have heard your agent mention something about an earnest money deposit. What is it exactly? Why do you need to have the funds ready before your offer is accepted?

When a seller accepts an offer, the buyer makes an earnest money deposit to the seller. It is usually between 1% - 3% of the purchase price. Also known as a “good faith” deposit, it shows the seller the buyer is serious about the purchase and it also protects the seller in case the buyer cannot perform and has to back out of the deal. Of course, if the buyer cannot perform, there are other contingencies that still protect the buyer. But if the contingencies are removed and the buyer has to back out of the deal, the seller gets the deposit. Once the offer is accepted and escrow is opened, the buyer has 3 days to deposit the earnest money. This money is held in an escrow account for the duration of the deal. Once the deal ready to close, the money will be applied towards the buyer’s down payment or closing costs.