What Is Earnest Money in Real Estate?

Earnest money is a buyer’s good-faith deposit submitted with an offer to show commitment. It’s held in escrow and later applied to the buyer’s closing costs or down payment—unless the contract ends outside protected contingencies.

✅ What Earnest Money Does

  • Shows commitment: signals to the seller the buyer is serious.
  • Reserves the home: seller takes the property off the market during due diligence.
  • Credits at closing: deposit applies to the buyer’s final cash to close.
  • Risk if default: buyer may forfeit funds if they back out without a protected reason.

💵 How Much Is Earnest Money?

Custom varies by market. A common range is 1–3% of the purchase price. In competitive areas, buyers sometimes increase the deposit or make a portion non-refundable after contingencies to strengthen the offer.

🏦 Who Holds the Deposit & When Is It Due?

  • Escrow holder: typically the title/escrow company or a closing attorney named in the contract.
  • Deadline: usually due within 1–3 business days after contract acceptance (wire or cashier’s check per instructions).
  • Receipt: you’ll receive an escrow receipt confirming funds were deposited.

🔐 When Is Earnest Money Refundable?

Refund rights are governed by the purchase contract. Common contingencies that protect the buyer’s deposit:

  • Inspection: buyer cancels during the inspection window due to condition issues.
  • Financing/Appraisal: loan is denied or appraisal shortfall can’t be resolved.
  • Title: defects uncovered that the seller can’t cure in time.
  • Home sale or other terms: as written in the offer.

If a buyer backs out after contingencies are waived/expired—or for reasons not protected—the seller may keep the deposit as liquidated damages (per contract).

📊 Earnest Money vs. Down Payment

  • Earnest money: paid soon after contract; sits in escrow; applied to closing.
  • Down payment: paid at closing; separate from the deposit but the deposit counts toward it.

🛡️ Best Practices to Protect Your Funds

  • Use verified wiring instructions: call the title/attorney at a known number before sending any wire.
  • Get everything in writing: escrow holder, due dates, and refund conditions must be spelled out in the contract.
  • Track deadlines: inspection/finance/title dates control refund rights—don’t let them lapse.
  • Keep proof: retain wire receipts and escrow confirmations.

📍 FSBO Tip

State who holds escrow, the exact deposit amount, and the due date inside your offer. Clear terms prevent disputes and keep your transaction on schedule.

❓ Earnest Money FAQs

Is earnest money required?

Not by law in most places, but it’s standard practice. A deposit strengthens an offer and reduces the chance of buyer default.

What if the buyer and seller disagree about a refund?

Escrow can only release funds according to mutual instructions or a legal order. Clear contract language and documented notices help avoid disputes.

Can earnest money be waived?

Yes, some buyers offer minimal or no deposit, but that can weaken the offer—especially in competitive markets.