An earnest money deposit (EMD) is a good-faith payment made by a buyer when the seller accepts their purchase offer on a property. By placing funds into escrow, the buyer demonstrates serious intent to complete the transaction and provides the seller with security against a buyer’s unjustified withdrawal.
Earnest money reassures sellers that you’re committed. If you breach the contract without a valid reason, the seller may keep the deposit as compensation for lost time and market exposure.
Typically, a neutral third party (an escrow company, title agent, or brokerage) holds EMD funds. Never hand them directly to the seller—using escrow ensures both sides are protected until closing.
EMD amounts usually range from 1% to 3% of the purchase price. In hyper-competitive markets, deposits can climb to 5%–10%. For example, 1% on a $400,000 home equals $4,000, whereas a 3% deposit on a $2.1 million Silicon Valley home is about $63,000.
Most sellers accept personal checks, wire transfers, or cashier’s checks. Confirm acceptable methods and delivery deadlines in your purchase agreement.
Earnest money reserves your right to buy; a down payment is the portion of the purchase price you pay at closing. EMD is applied to your down payment or closing costs if the sale goes through.
Earnest money is the buyer’s deposit; escrow refers to the neutral holding account for those funds (and sometimes documents) until closing conditions are met.
Buyers often include contingencies to protect the EMD: an inspection contingency lets you back out over major defects; a financing contingency covers mortgage approval; an appraisal contingency addresses low valuation issues.
If a contingency isn’t satisfied within its deadline, you can cancel the contract and recover your EMD in full.
Waiving contingencies or backing out without a contractually valid reason typically forfeits your deposit to the seller as liquidated damages.
Most agreements require EMD within a specified window (often 1–3 business days after acceptance). Missing this deadline can void the contract.
Schedule inspections and appraisals promptly. These milestones trigger contingency periods and determine if you can recover your deposit.
Lenders have their own underwriting timelines. Align your financing approval deadline with the contract’s contingency expiry to safeguard the EMD.
In bid wars, a higher EMD signals serious commitment. Sellers often favor offers with substantial deposits because they reduce perceived risk of buyer default.
Don’t overextend—offer an amount you can afford to lose if contingencies are waived or unmet. Strike a balance between competitiveness and risk tolerance.
Setting an EMD higher than you can absorb may force you to close or risk forfeiture. Calculate your budget before deciding on the amount.
Track all deadlines carefully. If you miss an inspection or financing cutoff, you may lose your right to a refund.
Review contract language on EMD refunds and forfeiture conditions. Clarify any ambiguous terms with your agent or attorney.
Standard EMD is 1%–3% of the purchase price, adjusted for local market customs and competition. Consult your agent for a tailored recommendation.
If the seller breaches the contract, the buyer is typically entitled to a full refund of the earnest money.
Yes. Upon closing, your EMD is credited against your down payment or closing expenses.
Earnest money itself isn’t taxable—it’s part of your purchase funds. However, consult a tax professional regarding any state-specific regulations.
