Earnest Money

What Is Earnest Money?

Earnest money is a deposit made by a buyer when submitting an offer on a property to demonstrate serious intent to purchase. It signals to the seller that the buyer is committed and not simply tying up the property while shopping for alternatives. Earnest money is held by a neutral third party, typically a title company or escrow agent, and is applied toward the buyer's down payment or closing costs at closing.

How Much Earnest Money Is Expected

Earnest money deposits typically range from 1-3% of the purchase price, though this varies by market and deal type. On a $200,000 property, expect to deposit $2,000-$6,000. In competitive markets, buyers may offer larger earnest money deposits to stand out and demonstrate stronger commitment. In softer markets, smaller deposits may be acceptable. The amount is negotiable between buyer and seller as part of the purchase agreement.

Held in Escrow

Earnest money is not paid directly to the seller. It is deposited into an escrow account held by a neutral third party, usually the title company or the buyer's real estate attorney. The funds remain in escrow until closing, when they are applied to the purchase price. This arrangement protects both parties by ensuring the funds are available and properly accounted for throughout the transaction.

Forfeiture Risk

If the buyer backs out of the deal without a valid contingency, the seller may be entitled to keep the earnest money as compensation for taking the property off the market. This is why contingencies in the purchase contract are critical. Financing, inspection, and appraisal contingencies give the buyer legal grounds to cancel the contract and recover their earnest money if specified conditions are not met. Without contingencies, walking away means losing your deposit.

Earnest Money as a Negotiation Tool

A larger earnest money deposit can strengthen your offer in a competitive situation. It tells the seller you are financially committed and less likely to back out. Some investors use larger deposits strategically when competing against multiple offers, particularly when they are confident in the deal. Conversely, a very small earnest money deposit may signal to the seller that the buyer is not fully committed, potentially weakening the offer.

Protecting Your Deposit

Always include appropriate contingencies in your purchase contract to protect your earnest money. Understand exactly what conditions allow you to cancel and recover your deposit, and be aware of the deadlines for exercising each contingency. If you need to cancel, do so in writing before the contingency deadline expires. Once a contingency period passes, your earnest money may become non-refundable. Work with a real estate attorney to ensure your contract adequately protects your deposit.