Earnest Money

Earnest money is a good-faith deposit made by a buyer when submitting an offer on real property, demonstrating to the seller that the buyer is serious about completing the transaction. It typically ranges from 1% to 3% of the purchase price on residential homes in the U.S., though in competitive markets buyers sometimes offer 5% or more to make their offer stand out. The funds are held in escrow by a neutral third party until closing, at which point they apply toward the buyer's down payment or closing costs.

The deposit is not a separate fee. It is part of your purchase price, paid early to signal commitment.

What Happens to Earnest Money

Three outcomes are possible once you place earnest money in escrow. Understanding each one upfront prevents costly surprises during the transaction.

• The sale closes: Your earnest money applies directly to the down payment or closing costs. You owe less at closing because those funds are already in escrow.
• The sale falls through under a contingency: You recover your full deposit if you exit the deal for a reason covered by a written contingency in the purchase contract, such as a failed home inspection, financing denial, or an appraisal that comes in below the purchase price.
• The sale falls through without a contingency: If you back out for a reason not covered by any contingency in your contract, the seller keeps the earnest money as liquidated damages. This compensates the seller for taking the home off the market while you were under contract.

Contingencies Protect Your Deposit

The most important thing you can do to protect earnest money is negotiate contingencies into your purchase contract before signing. Common contingencies include the financing contingency, which allows you to walk away if your mortgage is denied, the inspection contingency, which allows cancellation based on unsatisfactory inspection findings, and the appraisal contingency, which protects you if the property appraises below the purchase price.

In highly competitive markets, buyers sometimes waive contingencies to strengthen their offer. Waiving contingencies increases your odds of winning but puts your deposit at risk if anything unexpected derails the deal.

Who Holds the Earnest Money

Earnest money is typically held by an escrow company, title company, real estate attorney, or the seller's broker in a segregated trust account. It must not be commingled with the holder's own funds. When the transaction closes or falls through under a contingency, the holder disburses the funds according to the contract terms and any applicable state real estate law.

You have the right to receive written confirmation that your deposit was placed in escrow within the timeframe specified in your contract. Always confirm the deposit hit the escrow account before proceeding with the rest of the transaction.

Earnest Money vs. Down Payment

Earnest money is a subset of your down payment, paid early. Your down payment is the total amount you contribute from your own funds at closing as equity in the property. If you offer 1% earnest money on a $400,000 home, that is $4,000 deposited now that becomes part of your 10% or 20% down payment at closing. It is the same pot of money, just paid in two installments rather than one.

Sources

• https://www.consumerfinance.gov/owning-a-home/process/close/
• https://www.hud.gov/topics/buying_a_home