Last Updated: January 2026

Earnest money is a good faith deposit that a home buyer provides when making an offer on a house. This earnest money deposit shows the seller that the buyer is serious about purchasing the property and willing to put money on the line. In real estate transactions, earnest money serves as a critical component of the purchase agreement, protecting both buyers and sellers throughout the home buying process.

When you make an offer on a home, your earnest money deposit goes into an escrow account held by a neutral third party, typically a title company, real estate brokerage, or escrow company. If the sale closes successfully, your earnest money is applied toward your down payment and closing costs. Understanding how earnest money works, how much earnest money you should offer, and when you can get your money back is essential for any prospective home buyer.

What Is Earnest Money?

Earnest money, also called a good faith deposit, is a sum of money a buyer submits with their purchase offer to demonstrate serious intent to buy the home. This deposit is not the same as the down payment, it's an initial amount that shows the seller the buyer is committed to the transaction.

The earnest money deposit protects sellers from buyers who might tie up a property without genuine intent to purchase. By putting down earnest money, the buyer shows they have "skin in the game" and are less likely to walk away without valid reasons.

How Earnest Money Works

Here's the typical earnest money process in a real estate transaction:

1. Buyer makes an offer: When submitting a purchase offer, the buyer specifies the amount of earnest money they'll provide
2. Seller accepts the offer: Once both parties sign the purchase agreement, the earnest money becomes due
3. Deposit goes to escrow: The buyer delivers the earnest money check (or electronic transfer) to the escrow agent or title company
4. Funds are held in escrow: The money sits in an escrow account, protected from both parties until closing
5. Applied at closing: If the sale closes, the earnest money deposit is credited toward the buyer's down payment and closing costs

Who Holds Earnest Money?

Earnest money is held by a neutral third party in an escrow account. Common escrow holders include:

• Title companies: Most common in many states, title companies hold funds until closing
• Real estate brokerages: The listing agent's brokerage may hold earnest money in their trust account
• Escrow companies: Dedicated escrow services specialize in holding and disbursing funds
• Real estate attorneys: In some states, attorneys handle escrow as part of closing services

Never give your earnest money deposit directly to the seller. A legitimate escrow agent protects your funds and ensures they're distributed according to the purchase agreement terms.

How Much Earnest Money Should You Offer?

The amount of earnest money varies based on local market conditions, purchase price, and competition among buyers. Understanding typical earnest money amounts helps you make competitive offers without overexposing yourself financially.

Typical Earnest Money Amounts

While earnest money requirements vary, here are general guidelines:

• 1-3% of purchase price: The standard range in most real estate markets
• Flat amount ($1,000-$5,000): Common for lower-priced homes or slower markets
• 5-10% in competitive markets: Hot markets may require larger deposits to win bidding wars

Factors That Affect Earnest Money Amounts

Local market conditions: Seller's markets typically require larger earnest money deposits to compete with other buyers. In buyer's markets, smaller deposits are often acceptable.

Property demand: Desirable homes with multiple offers may require higher earnest money to stand out. Your real estate agent can advise on competitive amounts for specific properties.

Purchase price: Higher-priced homes generally require larger absolute amounts, even if the percentage stays the same.

Local customs: Some regions have established norms for earnest money amounts. Your agent will know what's typical in your area.

When Is Earnest Money Due?

The earnest money deposit is typically due within a few days after the seller accepts your purchase offer. Understanding the timeline helps you prepare funds in advance.

Typical Earnest Money Timeline

• Day 0: Buyer submits purchase offer specifying earnest money amount
• Days 1-3: Seller reviews and accepts (or counters) the offer
• Days 1-5 after acceptance: Buyer delivers earnest money to escrow (specific deadline is in the purchase agreement)
• Days 5-30: Contingency periods (inspections, appraisal, financing)
• Closing day: Earnest money applied to buyer's costs

Most purchase agreements specify exactly when the earnest money deposit must be delivered, often within 24-72 hours of mutual acceptance. Missing this deadline could void your contract, so have funds readily available before making an offer.

How to Submit Earnest Money

Earnest money can be submitted through several methods:

• Personal check: Common but may take time to clear
• Cashier's check: Preferred because funds are guaranteed
• Wire transfer: Fast and secure, especially for larger amounts
• Electronic transfer: Many escrow companies accept ACH payments

Is Earnest Money Refundable?

Whether you can get your earnest money back depends on the contingencies in your purchase agreement and why the deal falls through. Understanding when earnest money is refundable protects your deposit.

Contingencies That Protect Your Earnest Money

Contingencies are conditions that must be met for the sale to proceed. If a contingency isn't satisfied, you can typically cancel the contract and receive a full refund of your earnest money:

Inspection contingency: Allows the buyer to back out if the home inspection reveals significant problems. You can request repairs, negotiate price reductions, or walk away with your earnest money if issues can't be resolved.

Financing contingency: Protects buyers who can't obtain mortgage approval. If your loan falls through despite good faith efforts, you get your earnest money back.

Appraisal contingency: If the home appraises below the purchase price and the seller won't lower the price, you can cancel and recover your deposit.

Home sale contingency: Contingent on selling your current home. If your home doesn't sell, you can exit the contract with your earnest money.

Title contingency: Protects against title issues like liens, encumbrances, or ownership disputes that prevent clear title transfer.

When You Might Lose Earnest Money

You could forfeit your earnest money if you:

• Back out without a valid contingency: Simply changing your mind doesn't entitle you to a refund
• Miss contingency deadlines: Failing to complete inspections or secure financing within specified timeframes may void your protections
• Waive contingencies: In competitive markets, buyers sometimes waive contingencies to strengthen offers, this means giving up refund protections
• Breach the contract: Failing to meet your contractual obligations (like providing required documents) could result in forfeiture

Earnest Money vs. Down Payment

Many first-time home buyers confuse earnest money with the down payment. While related, these are distinct concepts in real estate transactions.

Key Differences

How They Work Together

At closing, your earnest money becomes part of your total cash contribution. For example:

• Home price: $400,000
• Down payment required (10%): $40,000
• Earnest money deposited: $8,000
• Additional cash due at closing: $32,000 (plus closing costs)

The earnest money you already deposited in escrow is credited toward your down payment, reducing the amount you bring to the closing table.

Earnest Money in Different Real Estate Markets

Earnest money strategies vary significantly between buyer's markets and seller's markets. Understanding current market conditions helps you structure competitive offers.

Seller's Market Strategies

When inventory is low and competition is fierce:

• Offer higher earnest money: 3-5% or more demonstrates serious commitment
• Consider waiving contingencies: Risky but may win bidding wars (consult your agent first)
• Quick deposit delivery: Offer to deliver earnest money within 24 hours of acceptance
• Non-refundable earnest money: In extreme cases, making deposits non-refundable after a short period can strengthen offers

Buyer's Market Strategies

When inventory is high and sellers are motivated:

• Negotiate lower earnest money: 1% or even flat amounts may be acceptable
• Include all contingencies: Full inspection, financing, and appraisal protections
• Extended contingency periods: More time to complete due diligence
• Seller-paid closing costs: Negotiate for seller concessions while maintaining standard earnest money

Common Earnest Money Disputes

Sometimes earnest money becomes a point of contention between buyers and sellers. Knowing how disputes are resolved helps protect your interests.

Why Disputes Occur

Contingency interpretation: Disagreements about whether a contingency was properly exercised or whether conditions were met.

Deadline disputes: Confusion about when contingency periods expire or whether notice was properly given.

Breach of contract claims: One party claims the other failed to meet contractual obligations.

Damage discovered between acceptance and closing: New issues arise that weren't covered by the original inspection.

How Earnest Money Disputes Are Resolved

1. Mutual release: Both parties sign a release agreement specifying how funds are distributed, this is the fastest resolution
2. Mediation: A neutral third party helps negotiate a settlement; many purchase agreements require mediation before litigation
3. Arbitration: A binding decision by an arbitrator if mediation fails
4. Small claims or civil court: If other methods fail, legal action may be necessary, though costs often exceed the earnest money amount

The best protection is a clearly written purchase agreement with unambiguous contingency language. Work with an experienced real estate agent and consider having an attorney review contracts in states where this is common practice.

Earnest Money Tax Implications

Understanding the tax treatment of earnest money helps with financial planning, whether your transaction closes or falls through.

If the Sale Closes

When your home purchase closes successfully:

• Earnest money is applied to your purchase and becomes part of your home's cost basis
• No separate tax reporting is required for the earnest money itself
• The full purchase price (including earnest money) factors into future capital gains calculations when you sell

If You Forfeit Earnest Money

If you lose your earnest money deposit:

• The forfeited amount is generally not tax-deductible as a personal expense
• It's treated as a non-deductible personal loss
• Investment property transactions may have different tax treatment, consult a tax professional

If the Seller Keeps Your Earnest Money

From the seller's perspective:

• Retained earnest money is typically taxable income
• It's reported as ordinary income, not capital gains
• The seller may be able to offset this income with expenses related to the failed sale

Tips for Protecting Your Earnest Money

Your earnest money deposit represents a significant financial commitment. These strategies help protect your funds throughout the transaction.

Before Making an Offer

• Get pre-approved for a mortgage: Know exactly what you can afford before making offers
• Have funds readily available: Don't commit earnest money you can't quickly access
• Research the property: Drive by at different times, check neighborhood crime stats, and review public records
• Understand local customs: Your agent should advise on typical earnest money amounts and practices

In the Purchase Agreement

• Include appropriate contingencies: Inspection, financing, and appraisal contingencies provide exit options
• Understand all deadlines: Mark contingency expiration dates on your calendar
• Get everything in writing: Verbal agreements aren't enforceable, document all negotiations
• Review cancellation procedures: Know exactly how to exercise contingencies if needed

During the Transaction

• Complete inspections early: Don't wait until the last day of your contingency period
• Communicate through your agent: Keep a paper trail of all negotiations
• Meet all deadlines: Missing contingency deadlines can cost you your deposit
• Stay in contact with your lender: Ensure financing stays on track

Earnest Money and New Construction

Buying new construction involves different earnest money considerations than purchasing existing homes.

Builder Earnest Money Requirements

• Higher amounts: Builders often require 5-10% earnest money deposits
• Multiple deposits: Some require additional deposits at various construction milestones
• Non-refundable portions: Upgrade selections and design choices may be non-refundable
• Extended timelines: Construction can take 6-12 months or longer, tying up your funds

Protecting Yourself with Builders

• Review builder contracts carefully, they're usually written to favor the builder
• Negotiate contingencies for financing and major cost overruns
• Understand what happens if construction delays occur
• Consider hiring a real estate attorney to review the purchase agreement

State-Specific Earnest Money Rules

Earnest money practices vary by state. Understanding your state's requirements helps ensure compliance and protection.

Common State Variations

• Who can hold earnest money: Some states require licensed escrow companies; others allow real estate brokerages
• Dispute resolution procedures: State laws dictate how disputes are handled and funds released
• Interest on earnest money: Some states require interest-bearing escrow accounts
• Disclosure requirements: Varying requirements for how escrow information must be provided
• Attorney involvement: Some states require or encourage attorney review of real estate contracts

Your real estate agent should be well-versed in local practices, but for complex transactions, consulting a real estate attorney provides additional protection.

Frequently Asked Questions About Earnest Money

Working with a Real Estate Agent on Earnest Money

A qualified real estate agent provides invaluable guidance on earnest money strategies and protections.

How Your Agent Helps

• Market expertise: Advises on competitive earnest money amounts for your area and specific properties
• Contract negotiation: Structures contingencies to protect your deposit
• Deadline management: Tracks contingency periods and ensures timely compliance
• Dispute resolution: Advocates for your interests if earnest money disputes arise
• Escrow coordination: Ensures proper handling and documentation of your deposit

When interviewing agents, ask about their experience with earnest money issues and how they've helped past clients protect their deposits.

The Bottom Line on Earnest Money

Earnest money is a fundamental part of real estate transactions that demonstrates your commitment to buying a home while protecting sellers from frivolous offers. By understanding how earnest money works, how much to offer, and when you can get it back, you can confidently navigate the home buying process.

Key takeaways:

• Plan ahead: Have earnest money funds available before making offers
• Protect yourself: Include appropriate contingencies in your purchase agreement
• Meet deadlines: Missing contingency deadlines can cost you your deposit
• Work with professionals: A good real estate agent helps you structure offers and protect your interests
• Understand your contract: Know exactly when and how you can exit with your earnest money intact

Whether you're a first-time home buyer or experienced real estate investor, treating earnest money with the seriousness it deserves helps ensure smooth transactions and protects your financial interests throughout the home buying journey.