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What is earnest money and how does it work?

In home buying, earnest money is like a friendly handshake with the seller. It shows, "I'm really interested in your home." This deposit goes with your offer and shows the seller you want to make a deal. The amount can vary, so let's look at how it works and get you ready for what’s next.

Earnest money definition and purpose

As a house hunter, think of earnest money as your way of letting everyone know you're a serious contender. When you’re ready to put in an offer on a house you love, adding earnest money to the mix shows the seller you’re ready to make a deal.

How much does your earnest money deposit need to be?

The question everyone asks first: how much is this going to cost me? Typically, earnest money is 1 to 3% of the home’s purchase price. So, around $3,000 to $9,000 on a $300,000 house. This money is safely held in an escrow account until the deal closes.

Remember, you might need to show where this money comes from, and you should also show how long it has been in your account.


Here’s a nice detail: Some loan programs allow this money to be a gift from a family member. That’s right, you don’t have to handle everything by yourself. The lender usually needs proof that the money is a gift and does not need to be paid back.

How much earnest money do you need?

The earnest money you need usually ranges from 1% to 3% of the home’s price. However, this is not a strict rule. In a hot market with many bidding wars, offering more can help your offer stand out.
Consider offering 5% or even 10% to show the seller you are serious. Some sellers may prefer a round number, like $5,000 or $10,000, regardless of the home’s price.

What happens to earnest money at closing?

So, where does this money ultimately go? When the closing day arrives (did you manage to get any rest?), your earnest money deposit goes toward your down payment.

Why should you pay earnest money?

Earnest money is more than just a sign of interest—it's a key part of buying a home. When you make an earnest money deposit (EMD), you're giving the seller a solid sign that you're serious about your offer.


This little gesture does a lot: it not only shows you mean business but also ties you to the agreement's terms. It helps ensure that you stick with the deal, keeps you on track with deadlines and helps smooth out any bumps regarding the contract's contingencies. Earnest money can really make your offer stand out, showing the seller that you're ready and able to go through with the purchase just as planned.

What is a purchase agreement?

A purchase agreement is a contract between a buyer and seller that outlines the terms of a property sale, including the price and property details. Earnest money is a deposit made by the buyer to show their commitment to the transaction. If the buyer backs out without a valid reason, they may lose this deposit.

Essentially, the purchase agreement sets the transaction's terms while the earnest money deposit ensures both parties are serious about following through.

What does having pre-approval mean & how can it help?

Imagine you're in a competitive bidding war for the perfect property, where every advantage can make a difference. Having a pre-approval from a mortgage lender can put you in the lead. Unlike a pre-qualification, which is often based on verbal statements of your salary and credit score, a pre-approval is more official. It means your lender has thoroughly vetted your financial profile and has conditionally established the mortgage loan amount you qualify for.
This shows sellers your financing is in a good place, giving them extra confidence in your offer. Add in earnest money, and it's clear that you're ready and able to close the deal swiftly.

When Is earnest money refundable?

Your earnest money can come back to you if things don't work out, but only if certain conditions, or contingencies, are met. Here are a few to be aware of:

Home inspection contingency

Let’s paint a picture: you find a dreamy house, but your inspector uncovers some major issues—for example, the roof needs replacing or the foundation isn’t sound. A home inspection contingency provision allows you to cancel the purchase agreement and get your earnest money back without a fuss.

Appraisal contingency

What if the house appraises for less than the purchase price you offered? If you have an appraisal contingency in the purchase agreement, you can renegotiate the price with the seller or cancel the agreement and receive a full refund of your earnest money. No harm, no foul!

Financing contingency

What happens if your loan approval doesn't go through? Well, if you have a financing contingency in your purchase agreement, there's a good chance you can still get your earnest money deposit back. This contingency is like a safety net—it's there to protect you.
But there's a catch: you need to provide your lender with all the necessary information they require to properly assess and approve your loan. If your loan doesn't go through because you missed submitting some important details, you might not get your earnest money back.

Contingency for selling an existing home

Need to sell your current home before you can seal the deal? You're not alone there. To protect your earnest money, you should consider including a contingency for selling your existing home before closing on the purchase of the new home.

Should you waive a contingency?

Waiving a purchase agreement contingency can be tempting, especially if you're in a competitive market. But remember, it's a risk. Without contingencies, your earnest money could be on the line if things don’t go as planned.

How to protect your earnest money

Safeguard your earnest money every step of the way. Here’s how:

Step 1: Use an escrow account

Always opt to route your earnest money through an escrow account if possible. It’s safer than handing it directly to the seller and keeps your funds protected.

Step 2: Know your contingencies

Understanding the ins and outs of your purchase agreement’s contingencies is your safety net, so lean on your legal or other advisor if anything is confusing.

Step 3: Stay on track with your responsibilities

Stay vigilant. Keep a close eye on deadlines and requirements. Staying in sync with the purchase agreement’s timeline ensures that your earnest money isn’t forfeited because you miss a deadline.

Step 4: Put it all in writing

Get every agreement and every change in writing. This not only protects your earnest money but also clarifies any adjustments to the purchase terms.

Earnest money in action

Let’s examine how earnest money functions in some real-world scenarios—that you’ll hopefully never have to face. 

The forfeited deposit

Say you put down earnest money on three homes and plan to decide later which one you’ll buy—we get it, it’s nice to have options. However, unless you have a contingency that allows for recovery of the earnest money, the sellers you don’t choose may keep your deposits as compensation for taking their properties off the market. Hey, it's only fair.

The failed offer

Here’s a tough scenario: you lose your job and can’t secure a mortgage. If you don’t set a financing contingency, you might lose your earnest money. But with one, you may recover the deposit and regroup without financial stress. Make sure to always carefully read your purchase agreement.

Earnest Money FAQs

  • Earnest money is money a buyer submits with a purchase offer to show they’re serious about making a deal. It’s typically 1% to 3% of the sale price and is parked in an escrow account until closing. If the sale closes, the funds are applied to the buyer’s down payment or closing costs. If the deal falls through due to a valid contingency—like a failed home inspection or financing issue—the buyer is usually entitled to a full refund of the deposit.

  • Earnest money is usually refundable if the sale falls through for a reason covered by the contract, like a failed home inspection, low appraisal or financing difficulties. But if you back out for a reason not listed in the agreement, the seller may keep the deposit. Always carefully review your contingencies to protect your money.

  • Earnest money typically ranges from 1% to 3% of the home’s purchase price, but in competitive markets, you may need to offer more. In hot housing markets where bidding wars or cash offers are common, putting down 5% or more can help your offer rise to the top. Some sellers may also prefer a fixed amount, like $5,000 or $10,000, regardless of the home price.

  • If a deal falls through due to a reason specified by the contract—like a failed home inspection, low appraisal or financing issues—the buyer typically receives their earnest money back. However, if the buyer backs out without a valid contingency or misses key deadlines, the seller may keep the deposit as compensation for lost time and opportunity.

  • While both earnest money and a down payment involve putting money toward a home purchase, they serve different purposes. Earnest money is a smaller, good faith deposit made early in the process to show the seller you’re serious about buying the home. A down payment, on the other hand, is a larger sum paid at closing that goes directly toward the purchase price of the home and helps secure your mortgage. If the deal closes, your earnest money is usually applied to your down payment or closing costs.

  • Earnest money is typically held in an escrow account by a neutral third party, such as a title company, escrow company, real estate brokerage or attorney. This ensures the funds are protected and not in the hands of either the buyer or seller while the transaction moves forward.

  • Yes, earnest money can be applied to your closing costs. If the home purchase progresses as expected, the earnest money you deposited typically goes toward either your down payment or closing costs.

  • If you change your mind and decide against moving forward with the home purchase for a reason not covered by a contingency in your contract, you could lose your earnest money. This is because the seller may have taken the home off the market in good faith, and the deposit helps compensate them for lost time and potential buyers. However, if you withdraw due to valid contingencies—like a failed inspection or financing issues—you’re typically entitled to a refund of your earnest money back.

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