Earnest Money and Why It's Important

It’s important to understand how earnest money works when buying a home. An earnest money deposit shows the seller that the buyer is serious; that they are “earnest” in their intention to purchase the home. It is highly unlikely for a seller to consider an offer on their house without it being backed up by a deposit that the buyer could lose.

If the entire process and sale proceed successfully, the earnest money can be used for the down payment or closing costs. A buyer can consider this deposit as setting aside some funds to cover part of these later costs. In many situations, buyers are allowed to reclaim these funds when things do not go according to plan. 

A typical earnest money deposit is between 1% and 5% of the purchase price but it depends on the market. If there is a lot of demand in the area, a higher deposit may be more beneficial and may result in the offer being accepted by the seller. 

Once the offer is accepted, the earnest money deposit is usually held in escrow with the title company. Then, at closing, it will be accounted for.

Some buyers confuse earnest money with the down payment. They can both contribute to the purchase price of the home, but the earnest money is security for the seller while the down payment is money a buyer puts towards the purchase price. Unless the buyer is paying all cash, the balance of the buyer’s funds for purchasing the home will come from securing a mortgage.

Buyers can get their earnest money back in some situations, but it is also possible to lose the earnest money if certain terms of the purchase contract are not met. During the home inspection process, the buyer can choose to cancel the offer or have the seller rectify the problem before they proceed. The Arizona contract used for residential purchases has many provisions in it that protect both the buyer and the seller, and your buyer’s agent should clearly explain this to you, the buyer. As your fiduciary, your buyer’s agent has your interests as number one and will do their best to protect you from losing your earnest money deposit.