When you make an offer on a home, the seller will typically expect you to put down earnest money. This is a deposit that shows you are serious about buying the property. It is not your down payment. It is separate — but it can count toward your down payment or closing costs at closing. Here is how it works.
What Is Earnest Money?
Earnest money is a good-faith deposit made by the buyer when a home purchase offer is accepted. It signals to the seller that you are committed to following through on the deal. Without it, you could make offers on dozens of homes at once and walk away from any of them without consequence, leaving sellers stranded.
The earnest money deposit is held in escrow by a neutral third party, usually a title company, escrow company, or real estate attorney. It sits there until the transaction closes or falls apart.
How Much Earnest Money Is Required?
There is no set legal requirement for how much earnest money you must pay. The amount is negotiated as part of the purchase offer. Common amounts range from 1 to 3 percent of the purchase price in most markets. In competitive markets, buyers sometimes offer 5 to 10 percent to stand out.
On a $350,000 home, 1 to 3 percent means $3,500 to $10,500 in earnest money. In a hot seller’s market, offering a higher earnest deposit can make your offer more attractive because it signals stronger commitment.
What Happens to Earnest Money at Closing?
If everything goes according to plan and the sale closes, the earnest money is credited toward your costs. It can be applied to your down payment, closing costs, or a combination of both. You do not lose this money at closing — it simply becomes part of your total payment.
Can You Get Earnest Money Back?
Whether you can get your earnest money back if the deal falls through depends on the contingencies in your purchase contract. Contingencies are clauses that allow you to back out of the deal and get your deposit back under specific circumstances.
Common Contingencies That Protect Your Deposit
- Financing contingency: If you cannot secure a mortgage, you can walk away and get your deposit back. This protects buyers who are waiting on final loan approval.
- Inspection contingency: If the home inspection reveals serious problems and the seller will not address them, you can exit the deal and recover your deposit.
- Appraisal contingency: If the home appraises for less than the purchase price and the parties cannot agree on a new price, you can cancel and get your money back.
- Title contingency: If there are title problems (liens, ownership disputes) that cannot be resolved, you can exit.
When You Lose Your Earnest Money
You can lose your earnest money if you back out of the deal for a reason not covered by a contingency, or if you fail to meet contract deadlines (such as the deadline to apply for a loan). If the seller can show you breached the contract, they typically keep the earnest deposit as compensation for taking the home off the market.
In some cases, the seller may also have the right to sue for additional damages beyond the earnest money. This is rare for residential transactions but worth understanding.
How Is Earnest Money Paid?
Earnest money is typically paid by personal check, cashier’s check, or wire transfer within 1 to 3 business days of the offer being accepted. The funds go to the escrow or title company, not directly to the seller. Never pay earnest money directly to a seller — it should always go to a neutral third party.
Be alert to wire fraud in real estate transactions. Criminals sometimes intercept closing communications and send fraudulent wiring instructions. Always verify wire instructions by calling the title company directly using a number you independently look up, not one from an email.
Earnest Money vs Down Payment
These are two different things that many first-time buyers confuse. Your earnest money is a deposit made when your offer is accepted, typically within days. Your down payment is the full cash contribution you make at closing, which may be weeks or months later.
The earnest money is usually applied toward the down payment at closing, so you do not pay them separately. But the amounts are different — earnest money is typically 1 to 3 percent of the price, while a down payment might be 3 to 20 percent.
Tips for Protecting Your Earnest Money
- Make sure all contingencies you need are written into the contract before signing.
- Know your deadlines for each contingency and meet them. Missing a deadline can void your protection.
- Read your contract carefully or have a real estate attorney review it.
- Do not waive contingencies unless you fully understand the risk. In competitive markets, some buyers waive inspection or appraisal contingencies — this can cost you your deposit if anything goes wrong.
- Never pay earnest money in cash or directly to a seller or real estate agent. It must go to escrow.