Some people save aggressively to make cash offers on homes, but they are only a small subset of people buying homes. It is actually quite common for buyers these days to come to the table with much less than 20% of the potential purchase price saved for a downpayment. Buyers may arrange financing while only making a downpayment of less than 10%.
Even if you intend to finance almost the entire price of a piece of residential real estate, you will still usually need to have some liquid capital to serve as earnest money for the transaction.
What is earnest money?
Earnest money is a deposit essentially made against the down payment and purchase price of the property. It lets the seller know that you mean business. If you back out of the transaction for a reason not protected by a contingency, then the seller can keep your earnest money.
How much money will you need to set aside as earnest money?
You will need thousands of dollars in earnest money for the average residential property. Like the downpayment for a home, the earnest money is typically not a flat amount but rather a percentage of the amount someone will pay for the property.
It is common for people to offer between 1 and 3% of the purchase price as earnest money. In some cases, such as a new construction finished to someone’s specifications, the developer might expect 10% down as earnest money. Some buyers will offer even more than that, possibly as much as 20% like a traditional down payment, to make their offer more attractive in a market that favors sellers.
Planning ahead will set you up for success when you want to purchase residential real estate.