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[Earnest Money](/blog/earnest-money-explained) Guide for Home Buyers: How Much, When, and What Happens to It
You've found your dream home, your offer was accepted, and now your real estate agent says you need to submit an "earnest money deposit" within 48 hours. What exactly is this money, how much should you pay, and what happens if the deal falls through?
Earnest money is one of the most misunderstood parts of the homebuying process. Many buyers don't realize how much risk they're assuming when they hand over that check — or how to protect themselves with the right contract contingencies.
This guide explains everything you need to know about earnest money from a buyer's perspective.
What Is Earnest Money?
Earnest money (also called a "good faith deposit") is a sum of money a buyer pays shortly after their offer is accepted to demonstrate genuine intent to purchase the property. It signals to the seller that the buyer is serious — not just kicking the tires — and compensates the seller if the buyer walks away without a contractually valid reason.
Earnest money is not an additional cost on top of your purchase price. It becomes part of your down payment or closing costs at closing. Think of it as a deposit toward your larger down payment.
Key characteristics:
- Paid within 1–5 business days of offer acceptance (varies by contract)
- Held in a neutral third-party account (typically the [title company](/blog/title-search-explained) or escrow agent)
- Applied to down payment or closing costs at closing
- Can be refunded or forfeited depending on contract terms and circumstances
How Much Earnest Money Is Expected?
There's no universal standard, but typical expectations by market:
| Market Type | Typical Earnest Money |
|---|---|
| Slow buyer's market | 0.5%–1% of purchase price |
| Balanced market | 1%–2% of purchase price |
| Competitive seller's market | 2%–3% of purchase price |
| Hot/bidding war markets | 3%–5%+ (sometimes 10%) |
On a $400,000 home:
- Minimum in slow market: $2,000–$4,000
- Standard in balanced market: $4,000–$8,000
- Competitive market: $8,000–$12,000+
In extremely hot markets (San Francisco, New York, Miami), earnest money deposits of $20,000–$50,000 are not uncommon for high-value homes. Some cash buyers offer the entire purchase price as earnest money to demonstrate total commitment.
Where Does Earnest Money Go?
Your earnest money check is made out to the title company, escrow company, or real estate brokerage holding the deposit — not to the seller. This neutral third party holds the funds in a dedicated [escrow account](/blog/mortgage-escrow-explained) until one of three things happens:
- The deal closes: Funds are applied toward your down payment or closing costs
- You exit under a contingency: Funds are returned to you in full
- You forfeit: Funds are released to the seller as agreed compensation
Important: Never make your earnest money check out directly to the seller or their agent. This removes the protection of neutral escrow and creates legal complications.
Understanding Earnest Money vs. Down Payment
Buyers frequently confuse these two:
| Concept | Earnest Money | Down Payment |
|---|---|---|
| When paid | Shortly after offer acceptance | At closing |
| Purpose | Shows good faith, held in escrow | Your equity contribution |
| What happens if deal closes | Applied to down payment | Your equity in the home |
| Typical amount | 1%–3% | 3%–20%+ |
Your down payment is the total equity you put into the home. Earnest money is a subset of that — it's your down payment "preview" paid upfront to secure the property.
Contingencies: Your Refund Protection
The key to understanding when you get your earnest money back is understanding contingencies — conditions written into the purchase contract that, if not met, allow you to exit the contract and receive a full refund.
[Inspection Contingency](/blog/contingencies-explained)
What it does: Allows you to have the home professionally inspected and exit the contract (getting your earnest money back) if the inspection reveals significant issues.
Typical timeframe: 7–14 days from contract acceptance
How it protects you: If the inspection reveals a cracked foundation, significant water damage, faulty electrical, or any issue you're unwilling to accept, you can:
- Request repairs from the seller
- Negotiate a price reduction
- Exit the contract entirely and receive your full deposit back
In competitive markets, some buyers waive the inspection contingency to make their offer more attractive. This is risky — you lose the right to exit based on inspection findings. Never waive it without understanding what you're giving up. See our full [[home inspection guide](/blog/home-inspection-guide)](/blog/home-inspection-guide) before making this decision.
Financing Contingency (Mortgage Contingency)
What it does: Allows you to exit the contract and recover your earnest money if you cannot secure mortgage financing within the specified period.
Typical timeframe: 21–45 days
How it protects you: If your loan is denied, your rate or terms change materially, or you can't secure financing for any reason, the financing contingency lets you exit without penalty.
When it's waived: Cash buyers or buyers with iron-clad pre-approvals sometimes waive this. Never waive a financing contingency unless you are truly prepared to close with cash if the loan falls through.
Appraisal Contingency
What it does: If the home appraises below the purchase price, you can renegotiate or exit the deal and recover your earnest money.
Example: You agree to buy a home for $450,000. The appraisal comes back at $420,000. Without an appraisal contingency, your lender will only finance based on the $420,000 value — meaning you'd need to come up with an extra $30,000 cash or lose your earnest money. With the contingency, you can exit.
In competitive markets: Some buyers waive the appraisal contingency or add an "[appraisal gap](/blog/home-appraisal-came-low) clause," agreeing to cover gaps up to a certain amount.
Sale of Prior Home Contingency
What it does: Allows you to exit if you're unable to sell your current home within a specified period.
When used: Buyers who need the proceeds from their current home to fund the new purchase.
Seller's perspective: Sellers dislike this contingency because it introduces uncertainty. In competitive markets, this contingency often means your offer won't be accepted.
Situations Where You Lose Your Earnest Money
Earnest money is at risk when you breach the contract without a valid contingency protection. Common scenarios:
Cold feet (changing your mind): If you simply decide you don't want the house anymore outside of a contingency period, you forfeit your deposit.
Missing deadlines: If you fail to remove contingencies, deliver required documents, or close by the deadline without a valid extension, you may be in breach.
Financing failure without a contingency: If you waived the financing contingency and can't get a loan, you lose your deposit.
Failed to disclose deal-breakers: If you had a known issue (like a pending job loss that would prevent financing) and didn't disclose it, your exit won't be protected by contingencies.
Pro tip: Never rush to remove contingencies to impress the seller. Each removal is a real financial risk. Only remove contingencies when you're genuinely confident in that aspect of the deal.
Can Sellers Keep Your Earnest Money?
Yes — if you breach the contract. But the seller typically cannot keep your earnest money and also sue you for damages. The standard real estate contract treats the earnest money deposit as "liquidated damages" — the seller's agreed remedy for a buyer default.
Exception: In some states or contracts, sellers can pursue additional remedies (specific performance or additional damages) beyond the earnest money. Understand your state's laws and contract language.
Disputes: Earnest money disputes are common. If both parties claim the funds, the escrow holder typically interpleads the funds with the court and lets the dispute be resolved legally. This is time-consuming and expensive for everyone.
Strategies for Buyers in Competitive Markets
In seller's markets, earnest money becomes a negotiating tool:
Offer more earnest money: A larger deposit signals financial strength and commitment. A $20,000 deposit on a $400,000 home (5%) stands out versus the standard $4,000–$8,000.
Offer a shorter inspection period: Offering to complete inspections in 5 days instead of 14 reduces the seller's uncertainty window.
Offer to release earnest money early: Some buyers agree to release earnest money to the seller (rather than holding it in escrow) after contingencies are met — a risky but powerful offer in extremely competitive situations.
Large earnest money with strong contingencies: You can offer more money while still protecting yourself with well-drafted contingencies. It's not about choosing between protection and competition — it's about writing smart contracts.
How Earnest Money Affects Your Financing
Your lender will need to document where your earnest money came from. Because earnest money often comes from the same accounts as your down payment, lenders will:
- Ask for bank statements showing the deposit and withdrawal
- Verify the source of funds (gift money requires a gift letter)
- Confirm that the earnest money will be applied toward your purchase
Keep records of your earnest money payment — the check or wire confirmation, the escrow receipt, and any statements showing the funds held. Your lender's underwriting team will need these documents.
Timeline: Earnest Money Through Closing
Day 0: Offer accepted
Days 1–3: Earnest money deposit delivered to escrow
Days 7–14: Inspection contingency period
Days 21–45: Financing contingency period
Closing day: Earnest money applied to down payment or closing costs
The [[homebuying closing process](/blog/homebuying-closing-process)](/blog/homebuying-closing-process) involves many moving parts. Understanding where your earnest money fits into the timeline helps you stay organized and prepared.
State-Specific Variations
Earnest money rules vary by state. Key differences:
- Who holds the deposit: Title company, escrow company, or attorney (varies by state)
- Interest earned: Some states require that funds earn interest for the buyer; others don't
- Return timeline: If the deal falls through under a contingency, how quickly you get your money back varies (typically 3–10 business days)
- Attorney states: In states requiring real estate attorneys, the attorney often manages the escrow
Work with a licensed real estate agent in your state who understands local customs and contract language.
Protecting Yourself: A Checklist
Before submitting your earnest money:
☐ Verify the escrow company/title company is licensed and reputable
☐ Confirm the account is a dedicated escrow account (not commingled with operating funds)
☐ Read the earnest money agreement carefully — understand exactly what triggers forfeiture
☐ Ensure all your contingencies are clearly written with specific timelines
☐ Get a written receipt and record of the funds deposited
☐ Know your contingency deadlines and track them carefully
☐ Consult your real estate agent or attorney before waiving any contingency
Related Articles
- [[Closing Costs Guide for First](/blog/closing-costs-guide-first-time-buyers)-Time Buyers](/blog/closing-costs-guide-first-time-buyers)
- Home Inspection Guide
- Contingencies Explained
- How to Make a Competitive Offer
- First-Time Homebuyer Complete Guide
- Homebuying Closing Process
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