For many first-time home buyers, the homebuying process can feel like learning a new language. Terms such as "escrow," "contingency" and "closing costs" may appear overwhelming at first glance. One phrase you will hear early on when buying a new home is earnest money. Understanding what earnest money is and why it matters can help you feel confident as you move forward with your purchase.
Defining Earnest Money
Earnest money is a deposit made by the buyer when submitting an offer on a home. Think of it as a financial promise that shows the seller you are serious about completing the purchase. This deposit plays a crucial role in turning a verbal offer into a binding agreement.
While earnest money is sometimes referred to as a "good faith deposit," it is more than just a simple payment. It represents your commitment to move forward with the purchase and signals to the builder or seller that you are not casually shopping.
How Much Is Earnest Money?
The amount of earnest money required varies based on location, market conditions and builder policies. Typically, it falls between 1% and 3% of the purchase price, though in competitive markets it may be higher. For example, if you are purchasing a new home priced at $350,000, you can expect to put down $3,500 to $10,500 as earnest money.
Where Does the Money Go?
Once submitted, earnest money is usually held in an escrow account by a neutral third party such as a title company, brokerage or builder. The money stays there until the transaction closes. At closing, your earnest money is not an extra fee - it is applied toward your down payment or closing costs.
Can You Get Earnest Money Back?
Yes, in many cases. Earnest money is designed to protect both buyers and sellers. If the sale falls through due to a valid contingency written into the contract, such as one associated with financing, inspection or appraisal, then your earnest money may be returned to you. These protections allow buyers to proceed with confidence, knowing their money is safe under agreed-upon circumstances.
However, if you change your mind and walk away without a valid reason outlined in the contract, you risk losing your earnest money. In that case, funds are usually forfeited to the seller as compensation for taking the home off the market.
Why Is Earnest Money Important?
Earnest money helps keep both sides of the transaction accountable. For home buyers, it demonstrates serious intent and can strengthen an offer, especially in a competitive market. For sellers or builders, it provides assurance that buyers are committed to moving forward. Without earnest money, a seller could waste valuable time and resources on a buyer who is not ready to complete the purchase.
Tips for First-Time Buyer
- Read your contact carefully. Make sure you understand the contingencies and conditions that allow you to reclaim your earnest money if the deal does not move forward
- Ask about timelines. Know when earnest money is due and how it will be applied at closing.
- Work with professionals. Your onsite sales team and lender can explain requirements specific to your community and guide you through the process.
- Be prepared. Set aside funds for earnest money early in your home search so you are ready when you find the right home.
Earnest money may seem like just another step in the homebuying process, but it plays a critical role in showing your commitment, protecting your interests and moving you closer to owning your dream home. By understanding how earnest money works and how it fits into your new home purchase, you can approach the homebuying process with confidence and peace of mind.
To begin your new home search with Artisan Built Communities, explore our communities in metro Atlanta here.
