When making an offer on a home, you must come up with a deposit, known as the earnest money deposit, to show the seller that your offer is legitimate. Once an offer is accepted, this escrow deposit should be deposited within 24 to 48 hours. These funds are held by a third party, typically an escrow company until the deal is finalized. The escrow agent can be your real estate attorney or title company.

The question is, how much is enough, and how much is too much?

The problem with buying a home is that complications can occur, and there may be a situation that prevents you from buying the home, such as difficulty obtaining financing, or other unrelated problem. If you lay down too big of a deposit, you could end up losing a significant amount of money.

At the same time, you don’t want to be too stingy with the earnest money deposit, as the seller may have multiple offers, and will likely consider a larger deposit indicative of a more qualified candidate.

A larger earnest money deposit can also result in a lower offer price. If you put more money down early, you can get the home for less in the long run. Another offer may be higher than yours, but if you put down a larger earnest money deposit, the seller may choose you instead.

That said, many real estate professionals recommend putting down a deposit around 2% of the offer price, though as mentioned above, this can vary depending on demand and other conditions. But basically an earnest money deposit between 1-2% should be sufficient in most cases.

It’s important to make an agreement regarding the deposit as well. If something does go wrong, you’ll want to ensure you get all or most of your money back. Typically, the buyer will get their deposit back in full if something goes wrong from the start. If problems occur late in the transaction, the deposit may be split somewhat between buyer and seller, with a portion of the earnest money deposit lost to cancellation fees. And if the buyer is at fault, the seller will typically keep the deposit as a consolation for their time and effort.

Make sure you hold on to the copy of the check used for the earnest money deposit, as the bank or lender financing the deal will likely ask for a copy. And you may need to source the funds as well, so make sure you have enough money in your accounts to cover closing costs, reserve requirements, and the down payment.

If you are unable to come up with these funds, your mortgage application could be declined and you could lose your home and your deposit.

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