What is earnest money?
Earnest money is a “good-faith” cash deposit home buyers include with their offer to show sellers they’re serious about purchasing the home.
If the home seller accepts the buyer’s offer, the earnest money is deposited into a third-party escrow accountⓘ for safekeeping. If the buyer ends up closing on the home, their earnest money will go toward their down payment and/or closing costs.
If the deal falls through due to a reason protected by terms of the sales contract, the buyer should get their earnest money deposit back. But if the buyer backs out of the deal for reasons not protected by the contract, the seller usually keeps the earnest money.
This guide will break down everything you need to know about earnest money when buying a home. But your agent will ultimately be in the best position to advise you on how much earnest money you should include in your offer.
How much earnest money will I have to pay?
Earnest money deposits are typically between 1–2% of the purchase price of the home.
Typical earnest money deposit
Factors that can affect earnest money amounts
While 1–2% is common for earnest money deposits, you may actually end up paying a lot less (or way more) depending on several key factors.
How much competition are you facing?
The earnest money deposit amount often depends on the location and type of home you are purchasing. Certain markets are more competitive and some homes attract more offers than others.
You may have to increase your earnest money (among other things) for your offer to win if you’re competing with a lot of other buyers.
What are the norms in your target market?
Some markets simply have different standards and conventions when it comes to earnest money.
For example, earnest money deposits between 1–2% are common in South Carolina, while 10% is the norm in some parts of New York markets, like New York City.
These earnest money conventions are usually connected to local competition, demographics, and price point.
What kind of home are you buying?
Sometimes the amount you’ll have to put down for the deposit varies depending on what type of property you’re looking to purchase. For example, new construction homes typically require 5-10% down instead of the usual 1-2% you likely put down for an existing home.
How are you financing the purchase?
How you pay for the home can affect how much earnest money you’ll have to put down.
If you’re using a conventional or government-backed loan (FHA, VA, USDA), earnest money amounts are governed by local norms or situational factors, like the amount of competition or home’s value.
But if you’re making an all-cash offer and buying a home as is, you may not have to put down any deposit. There’s usually no holding period in this cash purchase scenario (unless you or the seller needs to delay closing) so the funds will likely transfer when the contract is signed.
💡 What if I’m buying the home with a low- or no-money down loan?
If you’re financing your purchase with a low- or no-money down loan, you’ll probably still have to offer a competitive earnest money deposit for the seller to accept it. If you end up purchasing the home, the deposit will go towards your down payment and closing costs. You’ll get a check back after closing if anything’s leftover.
There are multiple players involved in the process. If you want to know how your loan impacts earnest money (or vice versa), you may want to talk to any or all of the following: your real estate agent, attorney, and loan officer.
How do I figure out how much earnest money to offer?
Your real estate agent will advise on how much earnest money to include in your offer, based on factors like:
- Local real estate market norms
- Competition for the home
- The overall strength of your offer
- Input from the listing agent
Will putting down more earnest money make my offer more attractive?
Yes, if a seller were considering two otherwise identical offers (same price, terms, and financing), the one with the larger earnest money deposit would probably win.
Generally speaking, the more earnest money you stand to lose, the less risk there is for the seller that you’ll get cold feet, back out of the deal, and leave them in the lurch.
But earnest money’s ability to strengthen your offer is directly linked to other terms in the contract. For example, if the purchase agreement includes a lot of contingencies that let you back out of the deal scott-free, how much you put down doesn’t really matter. You have numerous opportunities to back out and get all of your money back, and the seller gets nothing.
So while more earnest money likely wins between two otherwise identical offers, an offer with less earnest money — but fewer (or no) contingencies — may actually be more attractive to a seller.
Can I offer less or no earnest money?
Earnest money is never required. You can offer less than the norm in your market – or none at all. But few sellers will accept an offer with little or no earnest money. This would be too risky for the seller because it allows you to back out of the deal at any time, for any reason, with no ramifications.
How earnest money works (step-by-step breakdown)
Step 1: Making and negotiating the offer
You’ll stipulate the amount of earnest money you plan to deposit in your offer, along with the offer price, target closing date, financing details.
Your offer will also include any contingencies, which are explicit circumstances in which you can exit the deal without losing your earnest money, like a bad home inspection or if your financing falls through.
The seller will either accept your offer as is or negotiate terms – which may include the earnest money amount – until an agreement is reached or they reject your offer.
Step 2: Going under contract
If both parties come to an agreement and the offer gets accepted, all of the terms are drafted up into a legally binding purchase agreement.
You and the seller sign the agreement, then you deposit your earnest money into an escrow account, and the contract goes into effect.
Assuming there’s a delay between the contract signing and closing, the seller must de-list the home and change the listing status to pending or contingent, depending on the terms of the agreement.
Step 3: After signing through closing
If the deal goes through, your earnest money will be applied toward your down payment and/or closing costs.
If you back out for a reason protected by your contract, you should get your earnest money back in full.
If you back out in a way that violates the terms of the agreement, the seller gets to keep your earnest money.
When is earnest money due?
You typically have 1-3 days to deposit your earnest money into an escrow account after you and the seller sign the contract.
What happens if I miss the earnest money deposit deadline?
Technically, missing any deadline will void your sales contract, allowing the seller to back out of the deal and/or go with another offer.
But in practice, you still may be able to work with the seller to submit the deposit a few days late – particularly in extenuating circumstances, like an accident or death in the family. Talk to your agent or attorney for advice on how to proceed if a situation arises that prevents you from getting your earnest money deposited on time.
What happens to my earnest money?
Earnest money gets deposited into a secure escrow account, managed by a neutral third party, like a legal firm or title company.
The earnest money sits in the escrow account until the transaction ends – either with a successful sale or one or both parties backing out.
Once the transaction ends, the earnest money – along with any other funds – is disbursed to the designated recipients, per the terms of the contract.
Is earnest money refundable?
Yes, you can get your earnest money deposit back in three scenarios:
- You end up buying the house
- You exercise a contingency and exit the deal
- The seller breaks the contract
Scenario 1: You end up purchasing the home
If you end up purchasing the home, your earnest money deposit will typically be applied toward your down payment and closing costs at closing. So while it’s not exactly a “refund,” it does end up coming back to you in the end.
Scenario 2: You exercise a contingency and exit the deal
Your earnest money should be refunded if you back out of the purchase for a valid reason before closing, per the terms of your contract. For example, if you have an inspection contingency and you decide not to purchase the home based on the results of the inspection, you should get your deposit back.
A contingency in real estate is a clause in the contract that allows the buyer to back out of the purchase without penalty under certain conditions. Here are a few of the most common contingencies in real estate deals:
- Financing contingency: Lets the buyer exit the deal if they can't secure approval for a loan within the period defined by the contract (typically 30–60 days).
- Home inspection contingency: Lets the buyer walk away if home inspection uncovers a serious issue with the home.
- Appraisal contingency: Lets buyers off the hook if the house appraises for less than the sales price.
Scenario 3: The seller breaks the contract
If the seller backs out of a deal — gets cold feet or violates some other explicit terms of the agreement — the contract is voided and you can technically walk away with your earnest money deposit. If you still want to buy the house, you may be able to negotiate new terms with the seller – or, if necessary, take legal action against them.
How to protect your earnest money
There are three key things you need to do to protect your earnest money:
- Make sure you have a sound contract
- Understand and abide by the terms of that contract
- Vet the escrow service (and payment process)
Make sure you have a sound contract
Go over the contract closely with your attorney and/or realtor to ensure you’ve got all the necessary contingencies and terms in there. And make sure everything is clearly worded so there’s no ambiguity for you or the seller, which could make it harder to get back your deposit if you need to back out – even for a valid reason.
⚡️ Quick Tip: Discuss a contingency strategy with your agent!
Contingencies can make your offer less competitive by adding more risk into the deal for the seller. You’ll want to strike the best balance between protecting your earnest money and submitting an offer that is attractive to the seller.
Make sure you understand and abide by the terms of the contract
Contracts can be confusing and filled with legal jargon. Work with your agent or attorney to ensure you understand everything in the purchase agreement. As importantly, make sure you will be able to abide by the terms. Failing to do so could result in you losing your earnest money.
Vet the escrow service (and payment process)
The escrow company is another part of the home buying process you should discuss with your agent or attorney. The seller normally selects the escrow provider, but you have the right to vet and potentially request a different provider if you or your real estate team deem it necessary.
Don’t give earnest money directly to the seller. Submit your deposit only to the official escrow account representative designated for that purpose, e.g., your agent, a title company, legal firm or real estate brokerage.
Avoid wire transfers if possible due to fraud potential. Many buyers will hand deliver or mail a check to the escrow service, which is safer. If wiring the money is absolutely necessary, check out these tips for avoiding wire transfer fraud.
FAQs about earnest money deposits
Earnest money is kept in the escrow account until closing. At that time, it will be applied to the down payment or closing costs. Consult with your agent or attorney to ensure you understand how earnest money is disbursed at closing.
Earnest money is a refundable deposit that serves as collateral to enforce the terms of the contract. If the buyer violates the contract, they lose that money. If the deal goes through, it goes toward their down payment and/or closing costs. Earnest money deposits are usually between 1-2% of the home’s purchase price, but can be much higher in more competitive situations.
The due diligence fee, on the other hand, protects the seller in case you back out of the deal for a protected (or non-protected) reason as a result of inspection reports or other information gained during the due diligence period. This way, the seller gets something (the due diligence fee) even if you are able to legally recoup your earnest money. The due diligence fee is only refundable if the seller backs out of the deal.
Due diligence fees aren’t mandatory, or even allowed, in every market. And if you’re waiving any due diligence contingencies or paying cash and buying as is, it obviously won’t apply. But if applicable, the due diligence fee is typically in addition to the earnest money deposit.
The typical due diligence fee is between $500-$2,000, although it can be much lower. Like earnest money, the due diligence fee is negotiable and credited to the down payment or closing costs if the deal goes through. Your agent will be able to let you know if a due diligence fee might apply in your situation.
Earnest money and down payments are both cash you have to pay out of pocket. But they happen at different times, serve different purposes, and go to different parties in the real estate transaction.
Earnest money is paid up front and serves as collateral for the seller to enforce the terms of the contract with the buyer (i.e., if the buyer breaks the contract, they are penalized by losing that deposit).
The down payment is what you agree to pay the lender at closing, per the terms of your loan. This payment and other provisions of the loan — like how much you can put down on the house, monthly payments, and interest rate — are arranged with the lender during the loan pre-approval process.
Usually, if you end up purchasing the home, earnest money will be applied toward your down payment – but the two are distinct and don’t necessarily interact.
The terms of the purchase agreement determine which party keeps the earnest money:
- If a buyer exits the deal for a reason protected in the purchase agreement, the earnest money is typically returned to the buyer.
- If the buyer backs out of the deal for reasons not protected, the seller keeps the money.
- If the deal closes, the earnest money goes toward the down payment or closing costs.
Earnest money is a good-faith deposit that a buyer submits to demonstrate to the seller that they are serious (or “earnest”) about purchasing the home.
The buyer pays earnest money after the seller accepts the offer and both parties sign the purchase agreement. The earnest money is deposited into a third-party escrow account for safekeeping until the closing.
Earnest money benefits both the buyer and seller. For the buyer, it triggers the home being taken off the market and reserved for them during the home buying process. For the seller, it provides a measure of confidence in the buyer’s ability and willingness to purchase the home.
A buyer can get the earnest money back through a protected contingency in the purchase agreement or when it is applied to purchase costs at the closing.
To protect earnest money, a buyer should follow these recommendations:
- Read and understand the purchase agreement terms
- Have an attorney or agent include relevant contingencies in the purchase agreement
- Abide by all requirements stipulated in the purchase agreement