What is earnest money?
Earnest money is a good-faith deposit — typically 1%–3% of the purchase price — paid when you make an offer on a home. It signals serious intent to the seller and is credited toward your down payment or closing costs at settlement.
When you submit an offer to buy a home and the seller accepts, you put earnest money — also called a good-faith deposit — into an escrow account to demonstrate that you're a serious, committed buyer. It shows the seller you won't walk away without consequence, which is meaningful because they're taking the home off the market while you complete financing and due diligence. The CFPB's homebuying guide covers earnest money as part of the offer and contract phase.
How much earnest money is standard?
Earnest money amounts vary by market. In most U.S. markets, 1%–3% of the purchase price is typical. In competitive markets, buyers sometimes offer 3%–5% or more to make their offer stand out. On a $400,000 home, 1%–3% means $4,000–$12,000 deposited at contract signing. Your real estate agent can advise on local norms.
Where does earnest money go?
The funds are held in a neutral third-party escrow account — typically managed by a title company, real estate attorney, or escrow company — until closing. At settlement, the earnest money is applied directly toward your down payment or closing costs. It is not an additional expense on top of those items.
When can you lose your earnest money?
- You back out without a contingency: If you simply change your mind and have no applicable contingency (financing, inspection, appraisal, or sale of your current home) in the contract, the seller typically keeps the deposit.
- Financing contingency waived: If you waived the financing contingency and your loan falls through, you may forfeit the earnest money.
- Missed deadlines: Missing key contract deadlines (inspection period, closing date) without an extension can trigger forfeiture.
- Contract breach: Any material breach of contract terms can allow the seller to claim the deposit.
When is earnest money refundable?
If the deal falls apart for a reason covered by a contract contingency — the home fails inspection, your financing is denied under a financing contingency, or the appraisal comes in low under an appraisal contingency — you are generally entitled to a full refund. The HUD buying-a-home resources note that contingencies protect buyers and should be explicitly written into the purchase contract.
Key facts
- Earnest money is deposited into a neutral escrow account at contract signing and applied toward the buyer's closing costs or down payment at settlement — it is not an additional cost. — CFPB — Owning a Home
- A financing contingency protects a buyer's earnest money if the mortgage is denied; without it, losing financing typically means losing the deposit. — CFPB — Owning a Home
- Buyers can protect their earnest money through contract contingencies — inspection, appraisal, financing, and home sale — each allowing cancellation with refund under specified conditions. — HUD
Key takeaways
- Earnest money is 1%–3% of the purchase price deposited at contract signing — it signals commitment to the seller.
- It's held in escrow and credited toward your down payment or closing costs at settlement.
- Back out without a valid contingency and the seller typically keeps it; back out under a contingency and you're refunded.
- Financing, inspection, and appraisal contingencies are the primary protections — never waive them without understanding the risk.
- In competitive markets, a larger earnest money deposit can strengthen your offer against competing buyers.
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