Earnest Money: What It Is and How It Works in Real Estate

What is earnest money?

Earnest money is a deposit a buyer gives when making an offer on a property to show serious intent. The deposit is typically held in an escrow or trust account and applied to the buyer’s down payment and closing costs at closing. It protects the seller by compensating for time off market and protects the buyer by giving time to complete financing, inspections, appraisal, and title work.

How it works

• The buyer and seller agree on an amount and include terms in the purchase contract.
• The buyer submits the earnest money when the contract or offer is signed.
• Funds are held by a third party (escrow company, title firm, real estate brokerage, or attorney).
• If the sale closes, the deposit is credited toward the buyer’s costs. If the deal fails, the contract determines who keeps the funds.

Key principle: if the buyer backs out for a reason covered by contract contingencies (inspection, appraisal, financing, sale of current home), they typically get the deposit back. If the buyer breaches the contract without an allowed reason, the seller may keep the earnest money.

Typical amounts

• Common range: 1–2% of the purchase price.
• In competitive markets, deposits may be higher (up to 5–10%).
• Some sellers accept fixed amounts (e.g., $5,000 or $10,000) rather than a percentage.
• Sellers may require staged or periodic deposits during extended due-diligence periods.

How earnest money is paid

Accepted methods: certified check, personal check, or wire transfer into a designated escrow/trust account. The escrow account may earn interest; in the U.S., if interest exceeds certain thresholds, tax forms (e.g., W-9) may be required to report it.

When is earnest money refundable?

Earnest money is refundable when the buyer terminates the contract under agreed contingencies, such as:
* Inspection reveals major defects and the contract allows cancellation.
* Appraisal comes in below the agreed price and the contract permits backing out.
* Buyer cannot obtain financing, if financing contingency is included.
* Buyer cannot sell an existing home, if a sale-contingency was agreed.

Earnest money may be forfeited if the buyer withdraws for reasons not covered by the contract (change of heart, missed deadlines, failure to meet contingency deadlines).

Protecting your earnest money deposit

Buyers should take these steps:
* Include clear contingencies for inspection, appraisal, financing, and sale of existing home.
* Put all terms in writing and ensure every amendment is signed by both parties.
* Meet all deadlines specified in the contract (inspection periods, financing deadlines).
* Use a reputable third-party escrow or title company—never pay the seller directly.
* Get and keep receipts and written confirmation that funds are held in escrow.

Earnest money vs. down payment

• Earnest money: a good-faith deposit to secure the offer and take the home off the market.
• Down payment: a larger portion of the purchase price required by the lender at closing.
  Earnest money is usually applied to the down payment at closing but can be refunded if a contingency is triggered.

Example

A buyer offers $100,000 on a home and deposits $10,000 into escrow as earnest money. If an agreed inspection contingency reveals a serious defect and the buyer cancels per the contract, the buyer gets the deposit back. If the buyer cancels without an allowed reason, the seller may keep the deposit as compensation.

Plain-language summary

Earnest money is basically a security deposit showing you’re serious about buying a house. It gives you time to inspect and secure financing; it protects the seller if you walk away without an agreed reason. Read and follow the contract, include necessary contingencies, and use a reputable escrow holder to avoid losing your deposit.

FAQs

Q: Is earnest money required?
A: Not required by law, but most sellers expect it and many offers are rejected without a deposit.

Q: How much should I offer?
A: Make it large enough to make your offer competitive but not so large that you’re exposing an unnecessary risk—commonly 1–2% of the price, higher in hot markets.

Q: Where is the money held?
A: In an escrow or trust account managed by a third party (title company, escrow company, broker, or attorney).

Q: How can I lose my earnest money?
A: By breaching the contract or missing contingency deadlines without an agreed legal reason to cancel.

Bottom line

Earnest money demonstrates seriousness and secures a buyer’s offer while due diligence occurs. Carefully drafted contingencies, written contract terms, timely actions, and third-party escrow protection are the best ways to preserve your deposit.