Should you offer earnest money in a competitive market?

Mortgage rates are low and financing is readily available, but the number of houses for sale is also low. How do you stand out in the market and buy the house you want?

One way is with earnest money.

This isn’t a requirement, but it can give you an advantage. Earnest money is a good faith deposit on a sale. It tells the seller that you are ready to buy their home and you won’t walk away. Once the seller accepts your offer, the earnest money can be applied to your down payment.

Especially in locations where buying a house is competitive, a substantial deposit of earnest money protects both the buyer and the seller. The seller knows you are serious about buying a home if they are taking the house off the market pending appraisal and inspection.

You can lose earnest money if you waive contingencies such as inspection or if you do not close on the agreed date. In this case, you could forfeit the deposit. If you just change your mind late in the buying process, the seller can keep the earnest money.

This is a situation where a good agent is crucial. The agent should put everything in writing, detailing timelines and contingencies. The agent will use a reputable third-party real estate broker or legal firm to put your money in escrow. Agents will also outline and clearly explain all contingencies.

When earnest money is necessary, the average good faith deposit is between 1 percent and 3 percent of the purchase price. In some very competitive markets, it can be as high as 10 percent.