Earnest money is a critical component in real estate transactions. As a good faith deposit, it demonstrates a buyer’s commitment and protects sellers from non-serious offers. Knowing how earnest money works can save you time, money, and legal headaches.
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Earnest money is a good faith deposit made by a buyer to show serious intent to purchase a property. Paid after offer acceptance but before closing, it assures the seller you’re committed and compensates them if you back out without valid reasons.
Once your offer is accepted, you’ll transfer earnest money into an escrow account. This deposit holds the property off the market while inspections, appraisals, and financing checks are completed. At closing, the funds apply toward your down payment or closing costs.
Earnest money is a temporary deposit to secure the contract; a down payment is a larger sum paid at closing that becomes part of your loan-to-value ratio and equity in the home.
Security deposits protect landlords against damage or unpaid rent in lease agreements, while earnest money safeguards sellers during a real estate sale.
An option fee grants the buyer exclusive rights to purchase within a specified period. Earnest money is refundable under contingencies, whereas option fees are often non-refundable.
Standard earnest money deposits range from 1% to 3% of the home’s purchase price. In hot markets, buyers may offer up to 5%–10% to strengthen their bids.
Supply and demand, average days on market, and competing offers influence deposit size. Research recent sales and consult your agent to tailor your offer.
Offer enough earnest money to show serious intent without straining your cash reserves. Factor in potential refunds and your down payment needs at closing.
A neutral third party—often an escrow agent or title company—holds your funds securely until closing or termination of the contract.
After offer acceptance, the contract typically requires earnest money within 3–5 business days. Your agent or lender will guide you through wiring or delivering a check.
Funds remain in the escrow account, accruing minimal interest (depending on state law) until disbursement at closing or refund upon contract termination.
Contingencies allow buyers to cancel the deal and retrieve earnest money if inspections reveal major issues, appraisals fall short, or financing is denied.
Specify inspection, appraisal, and financing contingencies in writing. Define timeframes clearly to avoid disputes over deposits.
Offer a higher deposit to compete in a seller’s market, but scale back if you need more liquidity for inspections and closing costs.
Sellers look for larger earnest money deposits to deter low-ball offers and ensure buyers won’t walk away easily. Highlight your deposit size to strengthen your position.
The Smiths offered $300,000 with a $3,000 earnest money deposit. Their offer beat out lower bids and secured their dream home.
The escrow agent held the deposit securely. On closing day, the Smiths’ $3,000 was applied to their down payment, reducing out-of-pocket costs.
Your earnest money is not collected until after acceptance. If the seller rejects your offer, there’s no deposit to refund.
Funds are credited toward your down payment or closing costs, reducing the cash you need at signing.
Yes—if you included a financing contingency and followed all deadlines, the deposit is refundable.
If you back out without valid contingencies, the seller typically keeps the earnest money as compensation for lost marketing time.
You can request changes, but the seller must agree. Higher deposits can make your offer more attractive, while lower deposits may require stronger contingencies.
Earnest money signals commitment, secures the contract, and balances risk between buyers and sellers. Understanding its rules protects your investment.
Work with experienced agents, lenders, and attorneys to navigate contract terms, protect your earnest money, and streamline the closing process.
Download customizable clauses to insert inspection, appraisal, and financing contingencies into your purchase contract.
Check local statutes and escrow guidelines to understand how earnest money is handled in your state.
