Earnest money is a good-faith deposit a buyer makes when an offer on a property is accepted. Typically held in escrow, this deposit shows sellers you’re serious and compensates them if you back out without valid reasons.
Sellers remove their home from the market once they accept an offer. The earnest money protects them from lost opportunities and ongoing expenses—like mortgage payments, taxes, and utilities—if the buyer breaches the contract.
Unlike a down payment, which is paid at closing, earnest money is a preliminary deposit. An option fee secures a buyer’s right to cancel within an agreed window; earnest money secures the transaction itself.
In most markets, earnest money ranges from 1% to 3% of the purchase price. Hotter markets may push deposits toward 3–5% to strengthen offers.
Consider purchase price, local competition, seller expectations, and your risk tolerance. Higher-priced homes or bidding wars often demand larger deposits.
You can offer a standard deposit with shorter contingency deadlines or make a portion non-refundable after inspection. This shows commitment while capping risk.
Deposit is due shortly after offer acceptance—often within 24–72 hours. Buyers submit a check or wire transfer to an escrow account or designated holder.
A neutral third party—such as a title company, escrow agent, real estate brokerage, or attorney—holds the funds until closing or contract termination.
Once received, the escrow holder issues a receipt and logs the deposit in the purchase contract. Keep your copy for reference and proof of payment.
Typical contingencies include home inspection, loan approval, and appraisal. If any contingency fails, buyers can usually cancel and reclaim their deposit.
Key refund triggers are unapproved financing, a low appraisal, or inspection issues that sellers won’t address. Always review your contract’s contingency deadlines.
If you back out for personal reasons after waiving contingencies or miss deadlines, the seller can keep your earnest money as compensation for lost opportunity.
An escrow deposit is any funds held by a third party during a transaction. Earnest money is a type of escrow deposit specific to real estate offers.
At closing, your earnest money typically rolls into the down payment or toward closing costs. It reduces the cash you need to bring to the table.
Option fees buy you a right to cancel during an agreed option period. Use them when you need extra time for inspections or to secure financing without risking your entire deposit.
Most lenders let you apply earnest money directly to your down payment. Confirm with your lender and escrow officer how it reduces your final cash requirement.
In some cases, sellers agree to let earnest money cover part of your closing costs. This must be explicitly stated in the purchase agreement.
Buyers should budget for earnest money, down payment, inspection fees, appraisal fees, lender fees, title insurance, and pre-paid taxes and insurance.
Offer a larger deposit or shorten contingency periods to stand out. If you can’t increase your deposit, consider non-refundable earnests or flexible closing dates.
Define clear deadlines for inspections, financing, and appraisal. Avoid open-ended contingencies that sellers might reject or dispute.
Choose experienced professionals who communicate deadlines and processes clearly. Clear coordination prevents missed deadlines and potential forfeiture.
The Smiths offered $350,000 on a suburban home with 2% earnest money ($7,000). They included inspection and financing contingencies with a 10-day inspection period. After a satisfactory inspection and bank approval, their deposit rolled into their 10% down payment.
1. Submit offer with earnest money clause.
2. Escrow holder issues receipt.
3. Complete inspections and secure financing within deadlines.
4. Address any contingencies or negotiate repairs.
5. Close escrow and apply earnest money to down payment/fees.
Most buyers offer 1%–3% of the purchase price. In competitive markets, consider 3% or more to strengthen your bid.
Earnest money is a specific type of escrow deposit used to secure a real estate purchase agreement.
If inspection, financing, or appraisal contingencies aren’t met, buyers can cancel and receive a full refund per contract terms.
If the appraisal is below the purchase price, buyers can renegotiate price, bring extra cash to closing, or cancel under the appraisal contingency.
Typically within 24–72 hours of acceptance. Check your contract for the exact deadline to avoid defaulting.
Yes. At closing, the deposit is applied toward your down payment or closing costs, reducing your final cash requirement.
