Glossary · The transaction

Earnest Money

Earnest money is a deposit a buyer submits after an offer is accepted to show serious intent to complete the purchase. Also called a good faith deposit, it is held in escrow by a neutral third party and later credited toward the buyer's down payment or closing costs. It gives the seller confidence to take the home off the market.

AFBy Andre Fontaine
Mortgage Market Analyst
RKReviewed by Renata Kowalski
Metro Housing Analyst
Published May 20, 2026 · Updated July 8, 2026

Also known as: Good Faith Deposit

How does earnest money work?

The buyer deposits earnest money, usually one to three percent of the price, into escrow shortly after both sides sign the contract. It sits in a trust account, is applied to the buyer's costs at closing, and is returned or forfeited based on the contract terms.

The deposit is not an extra cost on top of the price. At closing it counts toward the money the buyer already owes, so it reduces the cash still due.

A larger deposit can strengthen an offer because it signals commitment and gives the seller more assurance the buyer will follow through.

Why does earnest money matter?

Earnest money gives the seller a reason to trust an offer and stop marketing the home. It also creates real stakes for the buyer, who can lose the deposit by walking away without a valid contractual reason, which discourages careless offers.

When a seller accepts an offer, they pass up other buyers and pause showings. Earnest money compensates for that risk if the buyer later backs out without cause.

Because the deposit is refundable when a contingency applies, buyers who use inspections, financing, and appraisal protections keep meaningful control while still showing good faith.

When do you get earnest money back?

You generally get earnest money back when you cancel for a reason a contract contingency covers, such as a failed inspection, denied financing, or a low appraisal, within the stated deadlines. You risk forfeiting it if you walk away with no valid contractual reason.

Meeting the contingency deadlines is critical. Cancel one day late or waive a protection and the same reason may no longer entitle you to a refund.

If both parties dispute who is owed the deposit, escrow will hold it until they agree in writing or a court or mediator decides. Rules vary by state.

Worked example. For example, on a 350,000 dollar home a buyer might deposit 7,000 dollars, about two percent, as earnest money into escrow. At closing that 7,000 dollars is credited toward the down payment and closing costs, lowering the remaining cash the buyer must bring. If the inspection reveals a cracked foundation and the buyer cancels within the inspection window, the full 7,000 dollars is refunded.

Common mistakes with Earnest Money

  • Waiving contingencies to win a bid without realizing it puts your entire earnest deposit at risk if you later need to cancel.
  • Missing a contingency deadline by even a day, which can convert a refundable deposit into a forfeited one.
  • Handing the deposit directly to the seller instead of a neutral escrow or trust account.
  • Assuming earnest money is an added fee, when it actually credits toward your closing costs and down payment.
  • Offering a token deposit in a competitive market, which can make your offer look weak next to stronger bids.
Related terms
Term

Escrow

A neutral third party holds funds and documents until the conditions of a sale are met.

Define Term

Contingency

A condition in a purchase contract that must be met for the sale to proceed.

Define Term

Closing / Settlement

The final step where ownership legally transfers from seller to buyer and funds are disbur

Define Term

Appraisal Gap

The difference when a property appraises for less than the agreed purchase price.

Define

Earnest Money FAQ

How much earnest money should I put down?
Most buyers deposit one to three percent of the purchase price, though hot markets can push it higher. The right amount balances making your offer competitive against the cash you could lose if you back out without a valid reason. Ask your agent about local norms before deciding.
Is earnest money refundable?
It is refundable when you cancel for a reason covered by a contract contingency, such as inspection, financing, or appraisal problems, and you act within the deadlines. It is generally not refundable if you walk away with no valid contractual reason, in which case the seller may keep it.
Where is earnest money held?
Earnest money is held in a neutral escrow or trust account managed by a title company, escrow company, brokerage, or attorney, not by the seller. This keeps the funds protected until the contract terms decide whether the money is credited to the buyer, refunded, or paid to the seller.
When is earnest money due?
Earnest money is usually due within one to three business days after both parties sign the purchase agreement, though the contract sets the exact deadline. Delivering it late can breach the contract and jeopardize the deal, so confirm the due date and delivery method as soon as you go under contract.
Does earnest money go toward the down payment?
Yes. At closing your earnest money is credited toward your down payment and closing costs, so it is not an extra expense. It simply moves part of the cash you owe to an earlier point in the process. The settlement statement shows it as a credit in your favor.
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AF

Andre Fontaine Mortgage Market Analyst

Andre Fontaine is a mortgage market analyst who covers rate trends, loan products and lending standards using public Federal Reserve and HMDA data. He focuses on how financing conditions affect buyer affordability across income levels.