What is Earnest Money
Earnest money is a deposit made by a home buyer when submitting an offer to show serious intent to purchase — it's typically 1–3% of the purchase price and is applied toward closing costs or the down payment if the sale proceeds.
Earnest money (also called a "good faith deposit") is a sum of money a buyer puts down when making an offer on a home to demonstrate they are serious about completing the transaction. It signals to the seller that the buyer is financially committed and reduces the risk of a frivolous or non-committal offer.
In most markets, earnest money is 1–3% of the purchase price, though competitive markets sometimes see deposits as high as 5–10%.
Where Earnest Money Goes
Earnest money is held in an escrow account — typically managed by a title company, escrow company, or real estate attorney — until closing. At closing, the deposit is credited toward the buyer's down payment or closing costs. If the deal is completed, the earnest money is not an extra fee — it's simply applied to what you already owe.
When You Can Get Earnest Money Back
Whether earnest money is refundable depends on the contingencies in your contract. Standard contingencies that protect the buyer include:
- Financing contingency — if you can't secure a mortgage, you can back out and get your deposit back
- Inspection contingency — if the home inspection reveals serious problems and the seller won't negotiate, you can withdraw
- Appraisal contingency — if the home appraises below the purchase price and the seller won't reduce the price
If you back out of a deal without invoking a valid contingency, you typically forfeit your earnest money deposit.
When Earnest Money Is at Risk
In competitive markets, some buyers waive contingencies to make their offers more attractive. This can mean putting earnest money at risk — if the financing falls through or the inspection reveals a major problem and the buyer has waived those contingencies, they may lose the deposit.
Cold feet is not a valid reason to reclaim earnest money. If the buyer simply changes their mind outside of any contractual exit clause, the seller is generally entitled to keep the deposit as compensation for taking the home off the market.
Earnest Money vs. Down Payment
| Earnest Money | Down Payment | |
|---|---|---|
| When paid | At offer acceptance | At closing |
| Amount | 1–3% typically | 3–20%+ of purchase price |
| Purpose | Show good faith | Equity; required by lender |
| Refundable? | Conditionally (contingencies) | Returned if deal falls through before closing |
The earnest money deposit is ultimately part of your down payment — the two are not in addition to each other.
Tips for Protecting Your Earnest Money
- Always include standard contingencies in your purchase offer
- Understand each contingency deadline — missing them can waive your rights automatically
- Make sure earnest money is deposited with a neutral third party (title company or escrow agent), not directly with the seller
- Get everything in writing, including how and when the deposit will be returned if the deal doesn't close
For buyers in competitive markets where waiving contingencies is common, discussing the risk to your earnest money with your real estate agent and attorney before making that decision is essential.