The Short Answer
Earnest money is a deposit a homebuyer puts down to show the seller they’re serious about purchasing the property. It’s sometimes called a “good-faith deposit.” When you make an offer on a home and it’s accepted, you typically submit earnest money to back up your promise to follow through with the purchase.
The deposit isn’t an extra cost — it’s applied toward your down payment and closing costs when the sale goes through. It only becomes a real expense if you back out for a reason not protected by your contract.
How Earnest Money Works
When a seller accepts your offer, you sign a purchase agreement and deposit your earnest money — usually within a few days. The money isn’t paid directly to the seller. Instead, it’s held by a neutral third party, such as an escrow company, title company, or real estate brokerage, until closing.
At closing, the earnest money is credited toward what you owe. If the deal falls apart, who keeps the deposit depends on why it fell apart and what your contract says.
How Much Is Earnest Money?
Earnest money typically runs between 1% and 3% of the home’s purchase price, though it varies by market. In a competitive market, buyers may offer more to make their bid stand out.
Example: On a $300,000 home with a 2% earnest money deposit, you’d put down $6,000. That $6,000 is held in escrow and then applied toward your down payment and closing costs at the end. It’s not money on top of the price — it’s an early installment toward it.
When You Get Your Earnest Money Back
This is where contingencies matter. A contingency is a condition written into the purchase contract that lets you walk away and keep your earnest money if certain things go wrong. Common ones include:
- Financing contingency — protects you if your mortgage loan falls through
- Inspection contingency — lets you back out if the home inspection turns up serious problems
- Appraisal contingency — protects you if the home appraises for less than your offer
- Title contingency — covers issues found with the property’s title or ownership
If you cancel for a reason covered by an active contingency, you generally get your full deposit back.
When You Could Lose It
You risk losing your earnest money if you back out for a reason not protected by a contingency — for example, simply changing your mind, missing a contract deadline, or failing to complete steps you agreed to. In those cases, the seller may be entitled to keep the deposit as compensation for taking the home off the market.
This is why reading your contract carefully — and meeting every deadline in it — is so important. Your real estate agent and, in some states, a real estate attorney can help you understand exactly what’s protected.
How to Protect Your Earnest Money
- Keep your contingencies in place until you’re confident in the purchase rather than waiving them to win a bid
- Use a reputable escrow or title company to hold the funds, never the seller directly
- Get a receipt and confirm where the money is being held
- Meet every deadline in the contract — late action can forfeit your protections
- Beware wire fraud — confirm wiring instructions by phone with a known number before sending funds
The Bottom Line
Earnest money is a good-faith deposit — usually 1% to 3% of the price — that shows a seller you’re serious and is later applied toward your down payment and closing costs. With the right contingencies in place, it’s refundable if the deal falls through for a covered reason. Understand your contract before you sign, and you’ll know exactly when your deposit is at risk.
Frequently Asked Questions
Is earnest money the same as a down payment?
No, but it’s related. Earnest money is an upfront good-faith deposit made when your offer is accepted. It’s later credited toward your down payment and closing costs at the closing table, so it reduces what you owe — but it’s a separate, earlier step.
Where is earnest money held?
It’s held by a neutral third party — usually an escrow company, title company, or the real estate brokerage — in a separate account until closing. It’s never paid directly to the seller, which protects both sides.
Can I get my earnest money back?
Usually yes, if you back out for a reason covered by a contingency in your contract — such as failed financing, a bad inspection, or a low appraisal. You’re more likely to lose it if you cancel for a reason not protected by the contract or miss a deadline.
How much earnest money should I offer?
Typically 1% to 3% of the purchase price. In a hot market, a larger deposit can make your offer more attractive to sellers. Your real estate agent can advise on what’s customary and competitive in your area.
What happens to earnest money at closing?
It’s applied as a credit toward your down payment and closing costs. So if you deposited $6,000 in earnest money, that amount reduces the cash you need to bring to the closing table.
Is earnest money required to buy a home?
It’s not legally required, but it’s customary, and most sellers expect it. An offer without earnest money is weaker and may not be taken seriously, especially in a competitive market.