During the home buying process you may be asked to provide an Earnest Money deposit. But what is an earnest money deposit exactly? When buyers execute a purchase contract, the contract specifies how much money the buyer is initially putting up to secure the contract. It's a basically a good faith deposit, to show "good faith" and that you are serious in purchasing the house. Earnest money deposits however should not to be confused with a down payment

How much do you need to deposit?

Because there is no set amount, it varies from market to market and across the country. Deposits typically can range anywhere from 1 to 3 percent of the sales price but, there is no set requirement. Generally speaking, you want your deposit to be large enough that your offer is taken seriously, but you do not want it to be so large that you put significant funds at risk.   While the chance that you will have a problem is slim, the smaller the amount you have tied up and at risk in a deposit, the better.

Who holds the earnest money?

Typically the earnest money deposit should be made to a reputable third party such as a well known real estate brokerage, legal firm, escrow company or title company.  As a buyer, be aware that if you allow earnest money to be held and deposited by a seller or by a builder or developer for use in construction, you risk that they will not be able to return it to you in the event the transaction does not close for whatever reason. Most buyers prefer to have real estate agents or attorneys hold the earnest money deposit as  they are licensed by the state and required to deposit the money in a trust or escrow account, this reduces the risk that the monies will be improperly used. To avoid the loss of your deposit, follow these tips.

• Never give an earnest money deposit to the seller.
• Verify that the third party will deposit the funds into a separately maintained trust account.
• Obtain a receipt.

Is your earnest money deposit refundable?

Whether or not earnest money deposit is refundable depends on the real estate contract itself. It is very important that you indicate that your offer stipulates the terms for a refund of your deposit if the deal falls through.  Make sure it covers all of the “deal breaker” conditions you can think of that would be associated with a return of your earnest money.  In matters like this it is advisable that you consult a real estate attorney who can help ensure that your offer is written in a manner that protects your rights to the deposit.  Do your research to get the facts about state law and even local customs on refunds of deposits before your earnest money leaves your hands.

If you are serious about purchasing a home, you need to indicate to the seller you are serious. They’ll be taking what is probably their single largest asset off the market if they accept your offer. A reasonable earnest money deposit helps reassure the seller you are serious about buying their home.