What Is Earnest Money?
Earnest money is a good-faith deposit made by the buyer after a purchase offer is accepted. It signals to the seller that you are committed to the transaction and compensates them for taking their home off the market while you complete inspections, secure financing, and prepare for closing.
The deposit is held in a neutral escrow account — never given directly to the seller. At closing, it is applied toward your down payment and closing costs. If the deal falls through for a reason covered by your contingencies, you get it back.
How Much Earnest Money to Offer
- Standard range — 1-3% of the purchase price in most markets
- Competitive markets — 3-5% to make your offer stand out against multiple bids
- Slow markets — 1% or even a flat amount may be sufficient
- New construction — Builders often require larger deposits, sometimes 5-10%
On a $350,000 home, a typical earnest money deposit ranges from $3,500 to $10,500. The amount is negotiable — there is no legal minimum or maximum in most states.
Earnest Money vs Down Payment
Earnest money is not a separate cost — it becomes part of your down payment at closing. If you put down $3,500 in earnest money and your total down payment is $17,500, you only need to bring the remaining $14,000 to closing. Think of earnest money as an advance on your down payment that demonstrates commitment to the seller.
When You Lose Your Earnest Money
Your earnest money is at risk only when you back out without a valid contingency or breach the contract. Understanding these scenarios helps you protect your deposit.
- Cold feet after contingencies expire — Simply changing your mind after the inspection and financing contingency periods have passed means the seller can claim your deposit
- Missing deadlines — Failing to complete inspections, secure financing, or close by the contract deadlines can constitute a breach
- Waived contingencies — If you waive the inspection or appraisal contingency to win a bidding war, you lose that protection
- Contract breach — Violating any material term of the purchase agreement puts your deposit at risk
Contingency Protections
Contingencies are contractual conditions that protect your earnest money. If any covered condition is not met, you can cancel the contract and receive a full refund of your deposit.
- Inspection contingency — Cancel if the home has significant defects (typically 7-14 day window)
- Appraisal contingency — Cancel if the home appraises below the purchase price
- Financing contingency — Cancel if your mortgage is denied despite pre-approval
- Title contingency — Cancel if the title search reveals liens or ownership disputes
- Home sale contingency — Cancel if you cannot sell your current home by a specified date
The Escrow Account
Your earnest money is held in a regulated escrow account managed by the title company, escrow company, or real estate brokerage — never by the seller. The escrow holder follows the contract terms exactly and only releases funds at closing or upon a valid, mutually agreed cancellation. If buyer and seller dispute the deposit, the funds remain in escrow until both parties agree or a court decides.