Earnest Money Explained | Redfin

Whether you’re buying a home in Austin or a condo in Miami, you’ve probably come across the term “earnest money” during your home search. It’s a key part of the homebuying process – but one that can feel confusing if you’re not sure how it works. This Redfin article breaks down everything you need to know about earnest money, from how much to pay to when you might get it back (or lose it), so you can move forward with confidence.

What is earnest money? Earnest money, also known as a ‘good faith’ deposit, is a form of security deposit paid directly to the seller. It demonstrates your serious intent to buy the property and shows the seller that you are committed to the home purchase. In most cases, the earnest money deposit can also act as a deposit on the property you’re looking to buy. If the deal falls through due to a contingency outlined in the contract, like a failed inspection or financing issue, you usually get the money back. But if you back out for a reason not covered by a contingency, the seller may keep it.

How much is earnest money?

The buyer and seller can negotiate the earnest money deposit amount, but it typically ranges from 1% to 3% of the sale price, depending on the market. For example, on a $400,000 home, a 2% earnest money deposit would be $8,000. However, if you’re buying a home in a seller’s market (when there are more buyers than homes for sale), or bidding on a highly competitive home, you might want to offer more to strengthen your offer. 

Be sure to talk to your real estate agent about how much earnest money you should offer in the housing market you’re competing in. Opting for a higher deposit can make your offer stand out and show the seller you are serious about the purchase. They can help guide you on how to structure your offer to be most attractive to the seller while protecting your interests.

How and when to pay earnest money? 

Earnest money is usually paid within a few days of the seller accepting your offer. It is typically paid to an escrow account or title company, which holds it in an escrow account until the transaction closes. Other trusted third parties can include a real estate attorney. Payment methods include personal checks, cashiers, wire transfers, or money orders, depending on the terms of your contract. 

Is earnest money refundable?

Yes – it can be refundable, but only under certain conditions. If the sale falls through for a reason protected by a contingency or due to the seller breaching the contract, you may be entitled to get your deposit back. Here are some common scenarios where that applies:

1. If the seller doesn’t fulfill their side of the purchase contract. For example, if the home inspection found faulty windows and the seller agreed to replace them, but did not follow through by the contract deadline. That breach of contract allows a buyer to back out of the purchase and receive a refund of their earnest money. 
2. 2. If you invoke a contingency in your contract. There are a number of contingencies you can put into the contract, and if not met, you can walk away from the deal with your good-faith deposit in hand. Some examples include:
      
   • Financing contingency: Your loan falls through, and you can’t secure a mortgage.
   • Appraisal contingency: The home appraises for less than the offer price, and the seller won’t adjust the price.
   • Home sale contingency: You’re unable to sell your current home within a set timeframe.
   • Inspection contingency: The inspection uncovers major issues, and the seller won’t agree to repairs or concessions.
   • Title issues: If the title search reveals a lien or ownership dispute, that may be grounds for canceling the contract.

Having a contingency may also allow you to negotiate the terms of your contract. For example, you may be able to ask the seller to perform repairs or give a credit at escrow to cover the agreed-upon repair costs. Typically, a buyer and seller can negotiate a resolution so the sale can be completed.

Can you lose your earnest money?

Yes, it’s possible to lose your earnest money, but only under certain circumstances. Earnest money will be lost and kept by the sellers if you fail to meet the offer’s contractual obligations.  If you back out of the home purchase for a reason not covered by a contingency in the contract, the seller may be entitled to keep your deposit.

For example, if you simply change your mind about buying the home or miss a key deadline outlined in the agreement, you could forfeit your earnest money. That’s why it’s so important to understand the terms of your purchase agreement and work with a real estate agent who can help you stay on track.

In most cases, if you follow the contract and act in good faith, your earnest money will either go toward your closing costs or be returned if the deal falls through for a valid reason.

How to protect your earnest money deposit

Take the following steps to avoid losing your earnest deposit:

• Document everything. A home is one of the largest purchases many of us will make. Make sure the contract clearly defines what amounts to cancel the sale and who ends up with the earnest money. Include any amendments to details like buyer responsibilities and timelines.
• Use an escrow account. Never hand earnest money directly to a seller or agent.  Use a reputable third-party, such as an escrow company, legal firm, or title company. Ensure the funds are securely held within an escrow account and obtain a receipt.
• Understand the contingencies. Familiarize yourself with the contingencies included in the contract, and double-check the contingencies that protect your interests are included. Do not sign a home purchase agreement that doesn’t have the clauses that protect you.
• Fulfill obligations. Real estate purchase agreements typically establish deadlines to safeguard sellers. Honor these deadlines and be sure to promptly address inquiries, submit necessary documents, and meet inspection, appraisal, and closing timelines.

Earnest money is an integral part of most real estate transactions. Before signing a Purchase and Sale Agreement to buy a home, carefully review all contingencies, understand how much money you’ll need to pay, and know how to successfully recover your earnest money if you need to back out of the sale.

Earnest money FAQs 

Is earnest money required when buying a home?

It’s not strictly required, but it has become a common and beneficial practice. Offers that include earnest money are often viewed more favorably by sellers. While sellers can waive the requirement, it’s not common.

What if I don’t have earnest money?

Most sellers prefer offers with earnest money. However, you can discuss your situation with your real estate agent and the seller. If your financing is strong, a seller might agree to proceed without it. You could also consider a gift or loan from a family member.

What’s the difference between earnest money and a down payment?

Earnest money is a “good faith” deposit showing commitment to buy, while a down payment is a larger upfront payment for the home itself, often required by lenders for financing. Earnest money amounts are typically 1-10% of the sale price, whereas down payments are usually 3-20% or more. However, your earnest money can often be applied toward your closing costs or down payment at closing.