How much earnest money do Pennsylvania buyers need?

On Behalf of | Jul 29, 2022 | Real Estate Law |

Buying residential real estate is a complex process that requires years of preparation in some cases. You need to have a credit score good enough to qualify for a mortgage and enough money set aside for a downpayment. While 20% down is no longer the standard, you can expect to need thousands of dollars just to qualify for financing. You will also need to set some of that money aside as earnest money.

Your earnest money is a specific amount that you deposit in an escrow account. It serves to demonstrate to the seller how sincere you are in your desire to buy their property. After all, they could suffer expensive delays if the purchase falls through right before closing.

How much will you need to set aside for earnest money when buying residential real estate?

Earnest money practices have changed in recent years

It was once common for real estate agents to recommend that buyers put down between 1% and 10% of the price offered for the property as earnest money. However, as the market has become more competitive due to lagging supply and increasing demand, buyers have looked to their earnest money as a way of getting a seller to choose their offer.

Some buyers will go so far as to put down the 20% traditional downpayment as an earnest money deposit. The amount of competition for the property that you want to buy and your current financial circumstances will largely dictate how much earnest money you can offer on a property, but generally 1% is the minimum that a seller will accept.

You can protect your earnest money

The earnest money serves as compensation for the seller if you back out from the sale without a contractually-viable justification. Buyers sometimes seek to protect their earnest money by including contingencies in their offer.

Some of the more common contingencies include contingencies about your ability to secure a mortgage or to sell your home. A requirement that the property passes inspection can also be a helpful contingency.

Understanding the rules that govern earnest money deposits and how to protect those funds when buying residential real estate will take some of the risk out of your upcoming transaction.