Earnest money is a deposit you make when you submit an offer to buy a home. It shows the seller that you’re serious — “earnest” — about the purchase. Typically 1% to 3% of the home’s purchase price, it gets held in escrow and eventually applied toward your down payment or closing costs. If the deal falls through, whether you get it back depends on why.
How Earnest Money Works
When your offer is accepted, you deposit earnest money — usually within 1 to 3 business days — into an escrow account held by the title company, escrow company, or the seller’s real estate broker. It sits there until closing, when it gets credited toward your purchase.
The earnest money amount is negotiable and varies by market. In competitive markets, buyers often offer 2% to 3% to stand out. In slower markets, 1% may be standard. On a $400,000 home, that’s $4,000 to $12,000.
How Much Earnest Money Is Standard?
- 1% of purchase price: Minimum in most markets; may not be competitive in hot markets
- 2% to 3%: Standard in competitive markets; signals serious intent
- 5% or more: Used in highly competitive bidding situations to strengthen an offer
Your real estate agent can advise on local norms. In some markets, a larger earnest money deposit can substitute for (or supplement) other offer strengths.
When You Get Earnest Money Back
Your purchase contract will contain contingencies — conditions that must be met for the sale to proceed. If the deal falls through due to a failed contingency, you typically get your earnest money back. Common contingencies include:
- Financing contingency: If your mortgage is denied, you can exit and recover your deposit
- Inspection contingency: If the home inspection reveals major issues and you can’t reach an agreement with the seller, you can back out
- Appraisal contingency: If the home appraises below the purchase price and you don’t want to pay the difference, you can exit
- Home sale contingency: If you need to sell your current home first and can’t, you can exit
When You Lose Earnest Money
If you back out of a purchase for reasons not covered by a contingency, you typically forfeit the earnest money. Scenarios that can cost you the deposit:
- Backing out after waiving your inspection contingency because you changed your mind
- Missing the closing date without a valid reason or extension
- Failing to secure financing when you waived the financing contingency
- Simply deciding you don’t want the home after the contingency period has passed
This is why it’s critical to understand every contingency in your contract and its deadlines before signing.
Earnest Money vs. Down Payment
These are related but different. Earnest money is paid upfront when you make an offer — it’s at risk if you back out without a valid contingency. The down payment is the larger amount paid at closing. Earnest money is typically credited toward the down payment, so it’s not an extra cost — it’s a portion of your down payment paid early.
How to Protect Your Earnest Money
- Never make the check out to the seller: Earnest money should go to an escrow account held by a neutral third party — not directly to the seller or their agent
- Get everything in writing: All contingencies and their deadlines should be explicitly stated in the purchase agreement
- Know your contingency deadlines: Missing an inspection or financing deadline can cost you the right to use that contingency
- Request an extension if needed: If a contingency period is expiring and you haven’t completed your due diligence, ask for an extension in writing
Earnest Money in Competitive Markets
In a seller’s market, buyers sometimes waive contingencies to make their offers more attractive. Waiving a financing or inspection contingency puts your earnest money at significant risk. If you waive the financing contingency and your loan is denied, you lose the deposit. This decision should be made carefully with guidance from your agent and mortgage lender.
Bottom Line
Earnest money is part of nearly every home purchase — it demonstrates commitment and moves the transaction forward. Protect yourself by ensuring contingencies cover the main reasons a deal might fall through, understanding all deadlines, and always depositing to a neutral escrow account. If the purchase closes successfully, your earnest money simply becomes part of your down payment.