Protect your earnest money deposit with these tips.

Earnest money is a good-faith deposit that shows sellers you’re serious about buying their home. It typically ranges from 1-3% of the purchase price ($3,000-$9,000 on a $300,000 home). The money is held in escrow until closing, when it’s applied toward your down payment and closing costs. You can lose your earnest money if you back out without a valid contingency.

How Earnest Money Works

The Purpose

Earnest money serves two functions:

For sellers: Proof the buyer is committed and compensation if the buyer backs out improperly

For buyers: Secures the home while you complete inspections, financing and due diligence

The Timeline

1. Offer accepted: You submit earnest money (usually within 1-3 days)
2. Held in escrow: Money sits in a neutral third-party account
3. Closing: Applied to your down payment or closing costs
4. If deal falls through: Returned or forfeited depending on circumstances

Who Holds the Money

Earnest money is held by a neutral third party:

• Title company
• Escrow company
• Real estate brokerage
• Attorney (in some states)

It’s never held by the seller directly.

How Much Earnest Money Should You Pay?

Typical Amounts

Market Condition	Typical Amount
Buyer’s market	1% of price
Balanced market	1-2% of price
Seller’s market	2-3% of price
Hot market	3%+ or more

By Price Point

Home Price	1%	2%	3%
$200,000	$2,000	$4,000	$6,000
$300,000	$3,000	$6,000	$9,000
$400,000	$4,000	$8,000	$12,000
$500,000	$5,000	$10,000	$15,000

Factors That Affect Amount

Higher earnest money when:

• Multiple offers expected
• You want to stand out
• You’re asking for concessions
• Hot seller’s market

Lower earnest money when:

• Buyer’s market
• Property has been listed long
• You’re taking significant risk (as-is sale)
• Cash-strapped but qualified buyer

Protecting Your Earnest Money

Contingencies Are Your Protection

Contingencies let you back out and keep your earnest money. Standard contingencies:

Inspection contingency: Cancel if inspection reveals problems

Financing contingency: Cancel if you can’t get mortgage approval

Appraisal contingency: Cancel if home appraises below purchase price

Sale contingency: Cancel if you can’t sell your current home

How Contingencies Work

With a valid contingency:

1. Issue arises (inspection problem, loan denied, etc.)
2. You notify seller within contingency deadline
3. You cancel the contract
4. Earnest money is returned

Without contingency protection:

1. Issue arises
2. You want to cancel
3. Seller may refuse to release earnest money
4. Potential dispute or loss of deposit

When You Can Lose Earnest Money

You can lose your deposit if:

• You back out without a valid contingency
• You miss contingency deadlines
• You simply change your mind
• You can’t perform (not due to financing contingency)

Example: Marcus waived his inspection contingency to win a bidding war. After the contract was signed, he found a better house. He backed out and lost his $12,000 earnest money.

Earnest Money in Competitive Markets

Larger Deposits

In hot markets, larger earnest money signals commitment:

• Shows you’re financially capable
• Puts more skin in the game
• Makes sellers feel secure accepting your offer

Waiving Contingencies (Risky)

Some buyers waive contingencies to compete:

Inspection waiver: Very risky—could inherit major problems

Financing waiver: Risky if you’re not 100% certain of approval

Appraisal waiver: Means you cover the gap if appraisal is low

Better alternative: Shorten contingency periods rather than waive entirely

Non-Refundable Earnest Money

Some sellers request non-refundable earnest money:

• You forfeit if you cancel for any reason
• Extremely risky for buyers
• Only consider if you’re absolutely certain

What Happens to Earnest Money at Closing

Applied to Your Costs

At closing, earnest money becomes a credit toward:

• Down payment
• Closing costs
• Both

Example:

• Earnest money: $8,000
• Required down payment: $30,000
• Required closing costs: $12,000
• Cash needed at closing: $34,000 ($30,000 + $12,000 - $8,000)

How It’s Shown on Closing Disclosure

Your closing disclosure shows earnest money as a credit to the buyer, reducing cash needed at closing.

Earnest Money Disputes

When Disputes Happen

Disputes occur when both parties claim the earnest money:

• Buyer says contingency applies
• Seller disagrees
• Neither will sign release

Resolution Options

Mediation: Third party helps negotiate resolution

Arbitration: Third party makes binding decision

Litigation: Take it to court (expensive, time-consuming)

Wait it out: Money sits in escrow until resolved

Preventing Disputes

Put everything in writing: Document all agreements

Meet deadlines: Don’t miss contingency dates

Communicate clearly: Provide proper notice when exercising contingencies

Understand the contract: Know what triggers release or forfeiture

State-by-State Differences

Earnest Money Practices Vary

Amount norms:

• California: 1-3%
• Texas: 1-2%
• New York: Often 10% (higher than most states)
• Midwest: 1-2%

Who holds it:

• Some states: Title company
• Some states: Real estate brokerage
• Attorney states: Often the attorney

Interest on Earnest Money

In some states, earnest money earns interest:

• Interest may go to buyer
• Interest may go to the state
• Amount is usually minimal

Check your state’s requirements.

Payment Methods for Earnest Money

Acceptable Forms

Personal check: Most common, but risky if it bounces

Cashier’s check: Guaranteed funds, professional appearance

Wire transfer: Fast, secure, commonly used for larger amounts

Cash: Generally not accepted—no paper trail

Timing

When due: Usually 1-3 business days after offer acceptance

What happens if late: Could void the contract or give seller grounds to cancel

Get proof: Keep copies of checks, wire confirmations

Earnest Money FAQ

Is earnest money refundable?

Yes, if you cancel within your contingency protections. If you back out without a valid contingency, you may forfeit the deposit.

How much earnest money is typical?

1-3% of the purchase price in most markets. Hot markets may expect more. Buyer’s markets may accept less.

When do I pay earnest money?

Usually within 1-3 business days of offer acceptance. Your contract specifies the exact deadline.

Can earnest money be applied to closing costs?

Yes. It’s a credit toward your total cash needed at closing, which includes down payment and closing costs.

What if my financing falls through?

With a financing contingency, you get your earnest money back. Without one, you may lose it.

Who decides who gets the earnest money in a dispute?

If parties can’t agree, it may require mediation, arbitration or court. The escrow holder won’t release funds without agreement or court order.

Can I pay earnest money with a credit card?

No. Credit cards aren’t accepted for earnest money. Use a check (personal or cashier’s) or wire transfer.

Does earnest money go to the seller?

Not directly. It’s held in escrow. At closing, it’s applied to your costs. If you forfeit, it goes to the seller as compensation for taking the home off market.

Related Articles

• Earnest Money: How Much to Put Down and When You Get It Back
• Home Inspection Checklist: What Inspectors Look For
• Mortgage Pre-Approval: What It Is, How to Get It and Why It Matters
• What Happens at Closing: A Step-by-Step Walkthrough