What Is Earnest Money?

Earnest money is a deposit a buyer makes to show they are serious about purchasing a home. It is typically submitted after the seller accepts the buyer’s offer and becomes part of the home purchase agreement.

The deposit demonstrates good faith and commitment to completing the transaction.

1. How Earnest Money Works

Once a seller accepts an offer, the buyer provides an earnest money deposit.

Key points:

• The deposit is usually held in an escrow account by a third party such as a title company or real estate broker.

• The money is not given directly to the seller right away.

• It is applied toward the buyer’s closing costs or down payment when the sale is completed.

2. How Much Earnest Money Is Required

The amount varies depending on the market and property value.

Typical ranges include:

• 1% to 3% of the home’s purchase price

• Higher deposits may be required in competitive markets

Example:

• Home price: $400,000

• Earnest money deposit: $4,000 – $12,000

3. When Buyers Get Earnest Money Back

Earnest money is usually refundable under certain conditions called contingencies.

Common contingencies include:

• Home inspection issues

• Financing approval problems

• Low property appraisal

• Title problems

If these conditions are not met, the buyer may cancel the contract and receive the deposit back.

4. When Earnest Money Is Not Refunded

If a buyer backs out of the deal without a valid contingency, the seller may keep the earnest money.

This compensates the seller for:

• Time lost during the sale process

• Taking the property off the market

• Missed opportunities with other buyers

5. Why Earnest Money Is Important

Earnest money benefits both buyers and sellers.

For buyers:

• Shows serious intent to purchase

• Strengthens the offer in competitive markets

For sellers:

• Provides financial protection if the buyer cancels without reason

• Demonstrates buyer commitment

✅ Simple Example

If a buyer offers $300,000 for a home and puts down $6,000 in earnest money, that amount will typically be credited toward the down payment or closing costs once the purchase is finalized.