Using Earnest Money to Strengthen Your Offer in a Competitive Real Estate Market - Compass Mortgage (2024)

Purchasing a home is one of the biggest financial decisions you can make. A competitive market can sometimes drive you into making an over-budget offer.

But there are alternative ways to make your offer stand out and not break the bank.

Making smart earnest money strategy decisions and structuring your offer the right way can truly increase the chances of a successful bid.

Let’s dive into using earnest money as a strategy to get your offer accepted, best practices, and how Compass Mortgage can help you make a competitive offer.

What is earnest money?

When you make an offer on a home, you’ll typically include a deposit known as earnest money along with your offer.

This deposit indicates your “good faith” in following through with the purchase if your offer gets accepted.

Earnest money is not a down payment. The earnest money deposit gets applied toward the down payment or closing costs when the sale closes—but it’s a separate amount of money.

If the deal falls through, the seller can keep the earnest money in certain circ*mstances.

Why should buyers use earnest money in a competitive market?

Real estate markets fluctuate between buyers’ and sellers’ markets.

In a competitive, seller’s market like we currently have, there are often multiple offers on desirable homes that sell quickly above the asking price.

As a buyer, you need to make your offer stand out. Offering a higher earnest money deposit signals to the seller that you’re serious about purchasing the home.

It shows that you’re willing to put your money where your mouth is, essentially, and helps to protect sellers from broken deals.

Sellers have a higher incentive to accept your offer if they know that you’re more likely to follow through with the purchase.

How much earnest money should you offer?

There are no hard rules on how much earnest money you should put down.

Typical amounts are 1-2% of the purchase price, but borrowers are able and encouraged to offer more to make their bid stronger.

In a very competitive market, some experts recommend offering at least 2-3% of the purchase price as earnest money.

The amount you offer for earnest money depends on a few factors, including the following.

Your down payment amount

If you’re putting 10% or more down, offering more money down presents less financial risk.

With a smaller down payment, you want to be cautious about tying up too much in earnest money.

The purchase price

On higher-priced homes, offering 3% earnest money could be too much. Consider the dollar amount and what you can comfortably afford to potentially lose.

Your overall offer

If you are offering significantly above the asking price, slightly lower earnest money could still be acceptable.

Consider your own financial situation, but know that in a competitive market, you may need to offer more in earnest money than the minimum 1% to have a shot with your offer.

Structuring earnest money

Rather than offer all your earnest money upfront, you can structure it to pay out in two or more increments.

For example, you could offer 1% down initially, with another 1-2% due after the home inspection contingency period. An upfront payment signals that you’re serious about the purchase, but offers some protection to the buyer in case the inspection doesn’t go as expected.

Splitting earnest money into two payments may give you more flexibility to back out if major issues arise during the inspection.

Earnest money best practices

Follow these tips when leveraging earnest money:

• Have the cash readily available or get pre-qualified. You don’t want the deal to fall through because your earnest money check bounces.
• Make sure the amount and timing align with your purchase agreement. Putting down more upfront than agreed upon could delay processing.
• Be ready to potentially walk away from the earnest money if you back out, depending on the circ*mstance. Only offer what you are willing to lose.
• Ask for your earnest money back if the seller does not fulfill the purchase agreement.

Using a sufficiently compelling earnest money amount combined with a strong purchase offer can help your bid stand out from the pack.

In a competitive market, earnest money shows you are serious and can be key to sealing the deal on your dream home.

Leveraging earnest money to outbid cash offers

One of the biggest challenges when making an offer is competing against buyers who can pay with cash. All-cash offers are attractive to sellers because they don’t come with financing contingencies that can delay closings or fall through at the last minute.

As a buyer who needs a mortgage, you can overcome cash offers by getting pre-approved and leveraging earnest money.

You can further appease the seller by offering a shorter financing contingency window, or waiving the financing contingency altogether if you’re confident in your pre-approval.

Be aware that waiving contingencies is risky in case your financing falls through. Have a strong pre-approval letter from your lender before considering this approach.

Pairing increased earnest money with a shortened financing timeline is a proactive way to strengthen your position against cash buyers.

Compete with cash offers with Compass Mortgage

Compass Mortgage offers its own unique Get Committed® pre-approval program that goes above and beyond traditional pre-approval.

Our program offers a fully underwritten loan commitment—before you even make your first offer.

A loan commitment essentially has the power of a cash offer, showing the seller that you’re fully approved for financing and that your deal isn’t likely to fall through.

Combining your Get Committed® approval letter from Compass Mortgage with an earnest money deposit is sure to win you the home of your dreams.

Ready to make a competitive offer?

With smart earnest money strategies, you can maximize your chances of having your offer accepted.

If you’re ready to get pre-qualified and start using earnest money to maximize your leverage, the experts at Compass Mortgage can help.

Reach out and apply today to get started on making your strongest offer yet.

Find out how we offer home loans with a personal touch and a simplified process.

Photo by Maria Ziegler on Unsplash