Earnest Money: What It Is and How It Works

Earnest money is the deposit you make when your offer is accepted. It shows the seller you're serious. But it's also a risk — if you back out without a valid reason, you could lose it.

How Much Earnest Money Is Typical?

Usually 1% to 3% of the purchase price. On a $400,000 home, that's $4,000 to $12,000. In competitive markets, buyers sometimes offer 5% to make their offer stand out. In slow markets, sellers may accept less.

The amount is negotiable. It's not set by any law or lender requirement.

Where the Money Goes

The earnest money goes into an escrow account held by a title company, real estate broker, or attorney. Neither you nor the seller can touch it until closing. The escrow holder is a neutral third party.

At closing, the earnest money credits toward your down payment or closing costs. If everything goes smoothly, you never write an additional check — the deposit becomes part of your cash due.

When You Can Get It Back

You can get your earnest money back if:

• You exercise a contingency (inspection, financing, appraisal)
• The seller backs out of the deal
• The contract falls through due to a title issue or seller breach
• The stated contingency deadline passes without resolution

When You Can Lose It

You lose earnest money if you breach the contract without a valid contingency. Common scenarios: cold feet, finding a better house, or deciding you don't want the home after contingencies expire.

Protect your deposit by meeting contingency deadlines and communicating all concerns in writing before deadlines pass.

Earnest money isn't a scary concept — it's just a good-faith deposit that becomes part of your down payment. Follow the rules, use your contingencies, and you'll walk away with it intact (or applied to your purchase).