Understanding earnest money: A guide for prospective homebuyers

Key takeaways

• Earnest money is a good‑faith deposit paid by a buyer to show commitment to a home purchase, typically held in an escrow account until closing and later applied to the down payment or closing costs.
• While not legally required, earnest money is standard in competitive markets and usually equals 1% to 3% of the purchase price, helping sellers feel protected after taking a home off the market.
• Whether the buyer keeps or forfeits the deposit depends on contract deadlines and contingency clauses (such as inspection, financing or appraisal), with missed deadlines or waived contingencies increasing the risk of losing the funds.

In competitive housing markets, buyers often look for ways to strengthen their offers. One of the most consequential choices is an earnest money deposit, a sum that signals commitment but can also expose buyers to financial risk.

Earnest money is often the first money a buyer stands to lose if a deal falls apart. While the deposit is typically credited toward the purchase at closing, missed deadlines or waived protections can give sellers the right to keep it. Understanding how earnest money works and when it is refundable has become increasingly important as competition pushes buyers to take on more risk.

Earnest money, also known as a good faith deposit, is an upfront payment a buyer makes after an offer is accepted to show serious intent to follow through with a purchase. The funds provide sellers with reassurance that a buyer is committed and compensation if the deal collapses outside agreed upon terms.

The deposit is typically held in an escrow account until closing and is usually paid by wire transfer, certified check or personal check. If the sale is completed, the money is generally applied toward the buyer’s down payment or closing costs.

Earnest money is not legally required but it has become standard practice in most residential transactions, particularly in competitive markets. Sellers often expect a deposit and offers submitted without one may prompt a counteroffer requesting earnest money before negotiations proceed.

Earnest money is an upfront deposit made shortly after an offer is accepted, while a down payment is the larger sum paid at closing to complete the purchase. The two serve different purposes and move at different points in the transaction.

If the sale goes through, the earnest money deposit is typically credited toward the buyer’s down payment or closing costs. If the deal falls apart outside protected contingencies, however, earnest money, unlike a down payment, can be forfeited to the seller.

Earnest money serves two functions: It reassures the seller and strengthens the buyer’s offer. Once a seller accepts the purchase agreement, the home is typically taken off the market. If the buyer later walks away, the seller must relist the property and restart the process, which often comes at additional costs.

For buyers, the deposit is a tangible demonstration of commitment, but it also carries risk. Sellers may be entitled to keep the funds if a buyer exits the deal for reasons not protected by contract.

Earnest money is usually about 1% to 3% of the sale price. While a larger good faith deposit can demonstrate a more significant commitment to purchase a home, other factors can influence the competitiveness of your offer. 

“It can vary depending on the customs of your local market, but it all depends on what contingencies you have in place to protect that money,” said Sarah Alvarez DeFlorio, vice president of mortgage banking at William Raveis Mortgage. “If you have the ability to recover the entire earnest money deposit, it really shouldn’t move the needle to put additional funds down.” 

Once a buyer and seller agree on terms, the purchase agreement outlines how the earnest‑money deposit will be handled. This includes where the funds will be held, the conditions under which they may be refunded or forfeited, and the deadlines and contingencies that must be met for the sale to proceed.

Reach out to your real estate agent if you have any questions about how your earnest money is being managed. 

You should never directly pay earnest money to a seller or real estate brokerage. Instead, you should utilize a title or escrow company to hold your funds.

A title company ensures a smooth transfer of ownership from the seller to the buyer during a home sale. In many cases, it also provides escrow services, holding your earnest money deposit until the home sale is finalized. If a title company is not providing this service, an escrow company can also act as a neutral third party that manages these funds until the sale is complete.

Most earnest‑money disputes do not arise because buyers casually walk away, but because deadlines are missed or protections are waived in an effort to make an offer more attractive.

When the buyer goes under contract on a home, the purchase agreement sets specific deadlines to keep the transaction moving. These could include scheduling inspections by a certain date or securing your mortgage approval within a specific timeframe.

Missing a deadline can give the seller the right to terminate the contract and keep your earnest money deposit. While sellers may accommodate minor delays, buyers who fall behind risk losing contractual protections if extensions are not agreed to in writing.

A contingency is a condition written into a purchase contract that must be satisfied for the sale to move forward. If a contingency is not met, one or both parties may exit the agreement. For buyers, properly exercised contingencies typically allow the earnest‑money deposit to be refunded.

In competitive markets, buyers sometimes waive contingencies to make offers more attractive — a decision that can increase financial risk if problems arise later.

• Inspection contingency: An inspection contingency allows the buyer to inspect the home before closing. If the inspection uncovers any issues, this clause allows the buyer to negotiate for repairs or cancel the contract.  
• Financing contingency: A financing contingency allows you to back out of the sale if you cannot secure a home loan for the property. 
• Appraisal contingency: This clause allows you to back out of the sale if the home appraises for less than the agreed-upon purchase price. When an appraisal is low, you can negotiate with the seller or back out of the sale. 
• Home sale contingency: You might include a home sale contingency if you need to sell your current home to buy a new one. This stipulation allows you to back out of the sale if you cannot sell your current home before a specific date.  

Whether earnest money is refunded depends on the terms of the purchase agreement. If a buyer exits the deal for a reason protected by a contingency such as a low appraisal or failed home inspection — the deposit is typically returned. If not, the seller may be entitled to keep the funds.

Buyers who waive the financing contingency are at the most risk, according to DeFlorio.

“If you are not prepared to walk away from the deposit, it is very important that you protect yourself with a financing contingency in case you run into any issues with securing the mortgage,” said Alvarez DeFlorio. “In a busy market, many buyers are asked to waive these types of contingencies, which is why it is extra important that you consult with a mortgage professional ahead of time to make sure that you are confident you will be able to achieve the necessary financing.”

• Make your purchase agreement clear: Include the contingencies or stipulations that must be met for you to buy the home.
• Work with a reliable real estate agent or broker: Putting earnest money down is a big deal. Having a certified expert on your side who can talk you through the process and answer any questions will make the task far less jarring.  
• Ensure proper financing and mortgage preapproval: Secure your home financing and get a mortgage preapproval before making an earnest money deposit. If you submit an earnest money offer without securing a home loan, you could lose your deposit if the sale falls through.  

This story was updated April 23.