Earnest Money Explained: How It Works, How Much to Put Down, and How to Protect It

When you make an offer on a house, words aren't enough. The seller needs proof that you're serious. That's where earnest money comes in.

An earnest money deposit (also called a "good faith deposit") is money you put up when your offer is accepted to show the seller you're committed to the transaction. It's real money at real risk — but if you understand how it works, you can protect yourself.

What Is Earnest Money?

Earnest money is a deposit made by the buyer after a purchase agreement is signed. It tells the seller: "I'm serious about buying this house, and here's money to prove it."

The deposit is held in an [escrow account](/blog/mortgage-escrow-explained) — typically managed by the title company, escrow company, or real estate brokerage — until closing. It's not handed directly to the seller.

At closing, your earnest money is applied toward your down payment or [closing costs](/blog/homebuying-closing-process). You're not paying extra; you're just paying part of it early.

How Much Earnest Money Do You Need?

There's no fixed rule, but here are the norms:

Typical Amounts

• Most markets: 1%–3% of the purchase price
• Competitive markets: 3%–5% or more
• Rural or slower markets: 1% or even a flat $500–$1,000

On a $350,000 home, a typical earnest money deposit is $3,500–$10,500.

Factors That Affect the Amount

Market conditions: In a seller's market (multiple offers, low inventory), larger deposits make your offer stand out. In a buyer's market, smaller deposits are common.

Local customs: Some areas have strong norms. In parts of the Northeast, 5% is standard. In some Midwestern markets, $1,000 flat is common regardless of price.

Price of the home: Higher-priced homes typically require proportionally larger deposits.

Your agent's advice: Your real estate agent knows local norms. Listen to them. Offering too little can signal to the seller that you're not serious.

Can You Offer Too Much?

You can, but there's usually no benefit beyond a point. A $20,000 deposit on a $300,000 home doesn't make you more competitive than a $9,000 deposit if the rest of your offer is strong. And more money at risk means more to lose if something goes wrong.

How Earnest Money Works: Step by Step

Step 1: Make an Offer

Your purchase offer specifies the earnest money amount. This is negotiable — the seller can counter with a request for more.

Step 2: Offer Accepted

Once both parties sign the purchase agreement, the clock starts. You typically have 1–3 business days to deliver the earnest money deposit.

Step 3: Deposit into Escrow

You write a check or wire the funds to the escrow holder (title company, escrow company, or brokerage). The money sits in this neutral third-party account — neither you nor the seller can touch it unilaterally.

Step 4: Contingency Period

During the contingency period (typically 10–30 days), you complete your due diligence: home inspection, appraisal, financing, etc. Your contingencies are your safety net (more on this below).

Step 5: Contingencies Cleared or Waived

Once all contingencies are satisfied or waived, the deposit becomes "hard" — meaning you can no longer get it back by simply changing your mind.

Step 6: Closing

At closing, the earnest money is credited toward your down payment or closing costs. If your down payment is $15,000 and your earnest money was $5,000, you bring $10,000 to closing (plus closing costs).

How to Protect Your Earnest Money

Your earnest money is protected by contingencies — conditions in the purchase agreement that allow you to back out and get your deposit refunded. Here are the critical ones:

Inspection Contingency

This gives you the right to have the home professionally inspected and back out (or negotiate repairs) if significant issues are found. Typical timeframe: 7–14 days after acceptance.

How it protects you: If the inspection reveals a cracked foundation, mold, or a failing roof, you can cancel the contract and get your earnest money back.

Financing Contingency (Mortgage Contingency)

This protects you if your mortgage application is denied. Even with a pre-approval, a loan can fall through due to appraisal issues, employment changes, or underwriting problems.

How it protects you: If you can't get financing despite good-faith effort, you get your deposit back.

Appraisal Contingency

If the home appraises for less than the purchase price, this contingency lets you renegotiate or walk away.

How it protects you: If you offered $350,000 but the home appraises at $320,000, you can either renegotiate the price, cover the $30,000 gap yourself, or cancel and get your deposit back.

Title Contingency

This allows you to back out if the title search reveals problems — liens, ownership disputes, easements, or other issues that can't be resolved.

Home Sale Contingency

If you need to sell your current home before buying the new one, this contingency protects you if your home doesn't sell. Note: In competitive markets, sellers often won't accept offers with this contingency.

Important: Contingency Deadlines Matter

Each contingency has a deadline. If you miss a deadline — for example, you don't complete the inspection within the specified window — you may lose the protection that contingency offers. Track every deadline carefully.

When Do You Get Earnest Money Back?

You get your earnest money refunded if:

• You cancel within a contingency period for a reason covered by that contingency
• The seller breaches the contract (refuses to complete the sale, can't deliver clear title, etc.)
• Both parties mutually agree to cancel the contract

Refund Timeline

Getting earnest money back typically takes 3–10 business days after cancellation is agreed upon. Both buyer and seller usually need to sign a cancellation/release form. If there's a dispute, it can take weeks or even months.

When Do You Lose Earnest Money?

You lose your earnest money if you back out of the deal without a valid contractual reason. Common scenarios:

Cold Feet

You simply change your mind about the house after contingencies have passed. The seller keeps your deposit as compensation for taking their home off the market.

Missing Deadlines

You fail to complete an inspection or secure financing within the contractual timeframe, and the contingency expires.

Failing to Close Without Cause

Everything is in order — inspections done, financing approved, title clear — but you refuse to close.

Breach of Contract

You violate the terms of the purchase agreement (taking on new debt that kills your financing, failing to provide required documents, etc.).

How Much Can You Lose?

You lose the entire earnest money deposit. In some cases, the seller may also have the right to sue for additional damages (the difference between your contract price and what they eventually sell for, plus expenses). This is rare but possible.

Earnest Money in Competitive Markets

In hot markets, buyers sometimes take risks with earnest money to make their offers more attractive:

Larger Deposits

Offering 5%+ signals serious commitment and financial strength. It makes your offer stand out when sellers are comparing multiple bids.

Waiving Contingencies

Some buyers waive the inspection or appraisal contingency to be more competitive. This is risky:

• Waiving inspection: You might buy a home with $50,000 in hidden problems.
• Waiving appraisal: If the home appraises low, you must cover the difference in cash.

If you're considering waiving contingencies, understand exactly what you're giving up. Have an emergency fund to cover worst-case scenarios, and consider getting a pre-inspection (inspecting before making an offer) so you're not flying blind.

Releasing Earnest Money Early

Some sellers ask buyers to release earnest money directly to them before closing (making it non-refundable). This is extremely risky for buyers and generally not recommended.

Earnest Money vs. Down Payment vs. Option Money

These terms get confused. Here's the difference:

Earnest money: A good-faith deposit showing you're serious. Held in escrow. Applied to your down payment or closing costs at closing. Refundable under certain conditions.

Down payment: The portion of the purchase price you pay upfront (3%, 5%, 20%, etc.). Due at closing. Earnest money counts toward it.

Option money (Texas and some other states): A separate, usually smaller fee ($100–$500) that buys you an "option period" (typically 5–10 days) during which you can cancel for any reason. Option money is typically non-refundable but gives you an unrestricted right to back out.

Tax Implications

Earnest money itself isn't tax-deductible. Since it's applied to your purchase at closing, it simply becomes part of your [cost basis](/blog/real-estate-depreciation-explained) in the home. If you lose earnest money on a failed transaction, you generally cannot deduct the loss on your personal tax return (it's considered a personal expense). Consult a tax professional for your specific situation.

Frequently Asked Questions

Is earnest money required?

Not legally required, but practically essential. A seller is unlikely to accept an offer without it. It's standard practice in virtually every residential real estate transaction.

Can I pay earnest money with a credit card?

Generally no. Most escrow holders require a personal check, cashier's check, or wire transfer. Credit card payments create complications around refunds and interest charges.

What happens to earnest money if the deal falls through?

It depends on why. If you cancel under a valid contingency, you get it back. If you breach the contract, the seller keeps it. If there's a dispute about who gets it, the escrow holder keeps it until both parties agree or a court decides.

Can the seller keep my earnest money and sue me?

In most purchase agreements, the earnest money serves as "liquidated damages" — meaning it's the seller's sole remedy if you breach. However, some contracts allow the seller to pursue additional damages. Read your contract carefully.

Should I offer more earnest money to beat other offers?

It can help, but other factors often matter more: purchase price, contingencies, closing timeline, and your financing strength. A strong pre-approval letter and clean offer with fewer contingencies often outweigh a larger deposit.

Who holds the earnest money?

A neutral third party — typically the title company, escrow company, or one of the real estate brokerages involved. It's held in a trust or escrow account, separate from the holder's operating funds.

Can I put $0 earnest money?

You can try, but most sellers will reject the offer outright. Zero earnest money signals that you have nothing at stake and could walk away at any time with no consequences.

Bottom Line

Earnest money is a necessary part of buying a home. It demonstrates your commitment to the seller and gives the transaction structure.

Protect yourself by keeping your contingencies intact, tracking every deadline, and understanding exactly when your money is at risk. In most transactions, your earnest money becomes part of your down payment and you never think about it again. The key is making sure you're covered if things go sideways.

Typical deposit: 1%–3% of the purchase price. Make sure it's an amount you're comfortable putting at risk, keep your contingencies in place, and you'll be fine.

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