If you’re starting the process of buying a home, you probably hear a lot of phrases and terms that you might not understand. Each of these terms becomes commonplace to the realtor, mortgage broker, and those who work in this profession, but you may need a bit of understanding.

Buying a home is a dream for many, but you need to have funds to cover things like closing costs, taxes, insurance, appraisals, inspections, escrow, and of course, you may need earnest funds. What is earnest money, when necessary, and how much earnest money is enough to buy the home you desire?

Understanding Good Faith Deposits

The seller often requires some insurance if the potential buyer backs out, so they won’t be affected as severely. While contracts are supposed to be iron-clad once they’re signed, many things can go wrong.

All the time you spent going through buying their home can be costly if you back out for some unforeseen reason. Putting money upfront lets the seller know that you’re serious about this home, and in a bidding war situation, it may show favorably to you and the offer you place.

Once you sign an agreement, the seller will remove the home from the market or change the status to pending. The process of buying the house begins. It’s a significant financial hit should the seller be required to relist the home and start over from square one. So, this good faith deposit offers them a level of protection.

Should everything go as planned, then the money you put down will be used to pay for the closing costs or go towards the down payment amount that you’re required to pay? So, you’re in no way losing this money; you’re only making a deposit.

Now, a few contingencies can cause a potential buyer to legally back out of the contract without losing this money. One of the most common reasons to back out of a purchase agreement is if the inspection shows there are issues within the home that weren’t disclosed. For instance, if the owners stated the HVAC system and electrical systems were updated, but the inspection shows significant issues, it will be costly to fix.

You can back out of the contract using this contingency without your good faith money taking a hit. Using earnest funds became popular in markets where multiple offers are commonplace. It not only detours other potential buyers from bidding, but it helps the seller should you decide that you don’t want the home any longer.

How Much Earnest Money Is Enough?

It’s hard to pinpoint an exact amount as each area is different. If the listing has been sitting for months and the market is slow, you won’t need to put down as much. However, if the market is hot and there is much interest in a specific property, then it’s good to put a more significant amount down to show you’re serious.

Thankfully, real estate agents are well trained in this process, and they can help direct you on the proper amount of earnest money you’ll need. When in doubt, put more down, as you don’t have anything to lose. You don’t want to miss out on the home because you undercut the good faith deposit, as it could cause the sellers to accept a better offer.

Lastly, suppose the market is prolonged, or it’s considered a buyer’s market. In that case, you can expect to put between 1-3 percent down as your good faith deposit, which is enough.

Is This Money Refundable?

There are various contingencies on this good faith deposit to protect both the buyer and the seller. The purchase agreement will cover these stipulations, and they are as follows:


It’s always advisable to get preapproved before agreeing, and some sellers require it. However, whether you’re approved or not, you can get the earnest funds back if it’s written in the purchase agreement.

Home Inspection

The number one reason why homeowners back away from a deal is an inadequate inspection. Using an inspection contingency will allow you to legally back out of the agreement and recuperate the earnest funds. If you like the home, you can work with the seller and lower the price to accommodate the repairs.

Selling Current Home Contingency

If you find a home before your current home sells, then you can have a contingency contract. This contract will prohibit you from closing until your other home sells. If you cannot sell your other home before the contract expires, this contingency allows you to recoup your funds.

You don’t need to use earnest funds to buy a home, and they’re not always required when the market is sluggish. The key is to use them to strengthen your offer, especially when it’s a hot market and a highly desired property.

You can use many contingencies to get out of the deal and not lose your funds, but you don’t want to leave out the inspection or appraisal contingencies, as these provide a level of security for you.

Final Thoughts

When you already have considerable expenses that you must incur to buy a home, earnest money may seem like another out-of-pocket cost you want to avoid. However, you should know that it’s an essential part of the process in many markets.

Think of this money as another level of protection for both the buyer and the seller. If you back out and the seller incurs a tremendous financial loss, the good faith money will ensure they won’t take such a hit. As the buyer, you can have a valid reason to back out of the contract. However, this money is just another way to show the seller how serious you are about making this home yours.

Contact Sheridan Solomon & Associate Realtors Today

If you any more questions or need a little more guidance, the staff, and realtors at Sheridan Solomon & Associate Realtors are real estate experts in Macon, GA, and Warner Robins, GA. Call or email us today, and we can get you on the path to homeownership today.