If you are preparing to buy a home in New Jersey, you may hear your real estate agent or attorney talk about an earnest money deposit. It is an important part of many home purchases, especially in competitive markets like Monmouth County.
But how much earnest money do you actually need? And what happens to that money after you make your offer?
Here is what New Jersey home buyers should know.
What Is an Earnest Money Deposit?
An earnest money deposit is money a buyer puts toward a home purchase to show the seller that they are serious about completing the transaction.
It is sometimes called a good faith deposit.
Earnest money is not an extra fee added to the price of the home. If the transaction closes as planned, the deposit is generally credited toward the money the buyer owes at closing, such as the down payment or closing costs.
Is Earnest Money Required in New Jersey?
There is no law requiring a buyer to include an earnest money deposit with a home offer. However, earnest money is a common part of residential real estate transactions.
A seller may view a meaningful deposit as evidence that a buyer is financially prepared and committed to the purchase. This can become especially important when a property receives multiple offers.
For buyers looking at homes in Monmouth County, the appropriate deposit can depend on the property, price range, competition, financing, and overall terms of the offer.
How Much Earnest Money Do You Need in New Jersey?
There is no single required amount.
Nationally, earnest money deposits commonly fall somewhere between 1 percent and 10 percent of the purchase price, depending on the market and the transaction.
In New Jersey, buyers may sometimes use a two step deposit structure. A smaller initial deposit may be followed by a larger additional deposit according to the terms and deadlines written into the contract. The New Jersey REALTORS standard residential sales contract provides spaces for both an initial deposit and an additional deposit.
The final amount is negotiable.
Example of an Earnest Money Deposit
Suppose you are purchasing a home for $700,000.
A 5 percent deposit would be $35,000.
A 10 percent deposit would be $70,000.
That does not necessarily mean every buyer purchasing a $700,000 home should provide one of those amounts. The right deposit should be based on the specific transaction and the terms your real estate professional and attorney recommend.
Does a Larger Deposit Make an Offer Stronger?
Sometimes.
A larger earnest money deposit can signal to a seller that the buyer has available funds and intends to follow through with the purchase.
However, the deposit is only one part of an offer.
Sellers may also consider the purchase price, financing, proposed closing date, contingencies, and other contract terms.
A higher deposit should never be offered simply to make your offer look more attractive without first understanding the potential financial consequences.
Where Does the Earnest Money Go?
Earnest money is generally held in an escrow or trust account rather than being immediately given to the seller.
The New Jersey REALTORS standard contract provides for deposit money to be held in escrow until closing. At closing, those funds can then be applied toward the transaction.
Your contract will identify how the deposit is handled and when it must be delivered.
Can You Get Your Earnest Money Back?
Potentially, but it depends on the contract and the reason the transaction does not close.
Real estate contracts can contain contingencies involving issues such as financing, inspections, or other conditions. When a buyer properly exercises a contractual right to terminate, the deposit may be refundable.
On the other hand, a buyer who fails to meet contractual obligations or walks away for a reason that is not protected by the agreement could put some or all of the deposit at risk.
This is one reason buyers should carefully review contract deadlines and stay in close communication with their real estate agent and attorney.
What Is Attorney Review in New Jersey?
Attorney review is an important part of many New Jersey residential real estate transactions.
The New Jersey REALTORS standard residential sales contract includes an attorney review provision. The standard form states that the contract becomes final within three business days unless an attorney takes action during the review period.
Because every transaction is different, buyers should speak directly with their attorney about how attorney review affects their specific contract, deposit, and obligations.
Earnest Money Is Different From Your Down Payment
These terms are sometimes confused.
Your earnest money deposit is money delivered earlier in the transaction to demonstrate your commitment to purchasing the home.
Your down payment is the portion of the purchase price that you are paying from your own funds rather than financing with a mortgage.
If the sale closes, earnest money is generally credited toward the funds you owe at closing. It is not normally an additional expense on top of your purchase price.
Be Careful When Wiring Your Deposit
Real estate wire fraud is a serious concern.
Never rely solely on wiring instructions received through an unexpected email or message. Before sending a large deposit, independently confirm the instructions with the appropriate attorney, title company, bank, or other known party using trusted contact information.
The National Association of REALTORS recommends confirming wire instructions before initiating a transfer.
How Much Should You Have Available Before Making an Offer?
If you are actively looking for a home in Monmouth County, it is helpful to know how much cash you could comfortably access for a deposit before you begin submitting offers.
The amount you choose should fit your financial situation while also making sense for the property and current market conditions.
Before making an offer, consider discussing these questions with your real estate agent and attorney:
- What deposit amount is typical for this particular transaction?
- When will the deposit be due?
- Who will hold the money in escrow?
- What contingencies protect the deposit?
- Under what circumstances could the deposit be forfeited?
Knowing these answers before signing a contract can help you make a more informed decision.
Buying a Home in Monmouth County?
Earnest money is only one piece of a successful home purchase. Understanding how the offer, deposit, attorney review, inspections, financing, and closing process fit together can make the experience much easier to navigate.
If you are considering buying a home in Monmouth County and have questions about preparing for an offer or understanding the local buying process, contact Nicole Rabbat Levine at 732 216 4700 or realtornicolerabbat@gmail.com.
This article is intended for general informational purposes and is not legal or financial advice. Buyers should consult their attorney and other appropriate professionals regarding their individual transaction.