Everything You Need to Know About Earnest Money Deposits

When you make an offer on a home, one of the first financial steps you’ll encounter is the earnest money deposit — often called “good faith money.” It shows the seller you’re serious, committed, and ready to move forward. But what exactly is earnest money, how much should you put down, and when can you lose it?

Here’s everything buyers should know before making that first big move.

1. What Is Earnest Money?

Earnest money is a deposit a buyer gives to the seller when making an offer to show they intend to follow through with the purchase.

Think of it as:

• proof of commitment

• protection for the seller

• a placeholder that says, 'I want this house'

It’s typically held in escrow by a third party — not by the seller — until closing.

2. How Much Earnest Money Do Buyers Usually Pay?

The typical earnest money deposit ranges from:

• 1% to 3% of the purchase price

• In competitive markets: 5% to 10%

• For new construction: often fixed amounts or higher percentages

It depends on:

• local market conditions

• competition

• purchase price

• seller expectations

A stronger deposit can make your offer more appealing — especially in a hot market.

3. When Is Earnest Money Due?

Once the seller accepts your offer, the deposit is usually due within:

• 24–72 hours

• or as specified in the contract

Be prepared to transfer funds quickly (wire, cashier’s check, or deposit to escrow).

4. Where Does the Earnest Money Go?

Earnest money is placed into an escrow account, managed by:

• the title company

• a real estate brokerage

• an attorney

• an escrow company

It stays there until closing.

5. What Happens to Your Earnest Money at Closing?

At closing, the earnest money is applied toward your:

• down payment

• closing costs

• or purchase price credit

It’s not an extra fee — it becomes part of the money you were already planning to spend.

6. Can You Get Your Earnest Money Back?

Yes — if the deal falls apart for a valid reason covered by contingencies.

Common situations where you can get your deposit refunded include:

✔️ Inspection Contingency

If the inspection reveals serious issues and you walk away.

✔️ Financing Contingency

If your loan is denied despite good-faith efforts.

✔️ Appraisal Contingency

If the home appraises for less than the purchase price and negotiations fail.

✔️ Title Contingency

If there are unresolved legal or ownership issues.

✔️ Home Sale Contingency

If you're selling your current home and it doesn’t close in time.

As long as you follow the contract terms, your earnest money is protected.

7. When Can You Lose Your Earnest Money?

Buyers may forfeit their deposit if they:

❌ Miss deadlines

(e.g., failing to complete inspection on time)

❌ Break the contract without a valid contingency

(e.g., changing your mind after contingencies are waived)

❌ Fail to provide financing documentation or updates

❌ Engage in fraud or misrepresentation

❌ Back out after the contingency period expires

Losing earnest money is rare when buyers follow the contract carefully.

8. Does a Higher Earnest Money Deposit Help Your Offer?

Yes — in competitive markets, sellers often see a larger deposit as a sign of:

• serious financial strength

• lower likelihood of backing out

• commitment to closing

It can set your offer apart without increasing the purchase price.

9. Do You Ever Pay Earnest Money and a Down Payment?

Yes — they are separate.

• Earnest money = paid upfront when offer is accepted

• Down payment = paid at closing

But the earnest money reduces how much you owe on closing day.

Example:If you owe $30,000 for the down payment and already paid $5,000 in earnest money, you only owe $25,000 at closing.

10. Do All Home Purchases Require Earnest Money?

Not always.Some sellers waive it, and some markets use small deposits.

But in most traditional home sales, earnest money is expected and helps strengthen your position.

Final Thoughts

Earnest money deposits are a crucial part of the homebuying process — but they don’t have to be intimidating. When handled correctly, they protect both the buyer and the seller, showing commitment while keeping your interests secure through contingency protections.

If you’re getting ready to make an offer, understanding earnest money puts you one step ahead and helps you navigate the process with confidence.