An earnest money deposit is cash you put down when you make an offer on a house to show the seller you are serious about buying
When you submit an offer to purchase a home, the seller wants proof that you intend to follow through. An earnest money deposit (sometimes called a good faith deposit) is that proof. You typically wire or transfer this money to a title company or escrow agent — not directly to the seller — within one to three days of the offer being accepted. The amount is usually 1 to 3 percent of the purchase price, though it varies by region and market conditions.
The deposit sits in an escrow account while the sale moves forward. If the deal closes, the earnest money is credited toward your down payment or closing costs. If the deal falls apart for a reason covered by your purchase agreement — like a failed home inspection or appraisal — you get the money back. If you walk away without a valid reason, the seller usually keeps it.
Key Takeaways
- Earnest money is typically 1 to 3 percent of the purchase price and is held by a third party, not the seller.
- The deposit is credited toward your down payment or closing costs if the sale closes.
- You can recover the deposit if the sale fails for reasons covered in your purchase agreement, such as inspection or appraisal issues.
- The amount and terms are negotiable, and you should understand what conditions allow you to get the money back before you submit it.
How much earnest money do you need to put down
There is no fixed rule. In most markets, sellers expect 1 to 3 percent of the purchase price. On a $300,000 home, that would be $3,000 to $9,000. In a competitive market where multiple offers are common, buyers sometimes offer 5 percent or more to stand out. In a slower market, 1 percent may be enough.
Your real estate agent can tell you what is standard in your area right now. The amount you offer signals how serious you are — a higher deposit can make your offer more attractive to the seller, but you are also putting more money at risk if the deal falls through for a reason not covered by your contract.
Where the money goes and who holds it
The earnest money does not go to the seller. Instead, it goes to a neutral third party — usually the title company, escrow agent, or real estate brokerage handling the transaction. This protects both you and the seller. The seller knows the money exists and is real. You know it will not be spent or lost.
The escrow agent releases the funds only when specific conditions are met. If the sale closes, they credit it to your down payment or closing costs. If the sale fails and you are may have access to to your deposit back under the contract terms, they return it to you. If there is a dispute — for example, you want your money back but the seller claims you backed out without cause — the escrow agent may hold the funds until the dispute is resolved or both parties agree in writing.
When you get your earnest money back
Your purchase agreement lists the conditions under which you can back out and recover your deposit. These are called contingencies. Common ones include a home inspection contingency, an appraisal contingency, and a financing contingency.
If the home inspection reveals major problems and you decide not to buy, you can usually cancel the contract and recover your deposit. If the appraisal comes in lower than the purchase price and your lender will not approve the loan, you can typically walk away. If your mortgage application is denied through no fault of your own, the financing contingency protects you. The exact terms depend on what you and the seller agreed to in writing.
If you cancel for a reason not covered by a contingency — for example, you simply change your mind after inspection is complete — the seller usually keeps the deposit as compensation for taking the home off the market while you were under contract.
What happens if the sale falls through
The outcome depends on why the sale failed. If it failed because of a contingency you included in your offer, you should get your deposit back. This means you need to document the reason carefully. If the inspection reveals problems, keep the inspection report. If the appraisal is low, get a copy of the appraisal. If your loan is denied, get a letter from your lender explaining why.
Send these documents to the escrow agent and your real estate agent in writing, referencing the specific contingency in your contract. The escrow agent will release your deposit once they confirm the contingency was triggered. If the seller disputes your claim — for example, they argue the inspection contingency expired or you waived it — the escrow agent may hold the funds while you and the seller work it out, sometimes with help from your agents or an attorney.
Earnest money versus down payment
These are two different things, though the earnest money is credited toward the down payment at closing. The earnest money is what you put down when you make an offer, held in escrow while the sale is pending. The down payment is the total amount of your own money you are putting toward the purchase price at closing — typically 3 to 20 percent of the price, depending on your loan type and lender requirements.
If you put down $5,000 in earnest money on a $300,000 home and your down payment is $60,000, the $5,000 is credited to the $60,000. You will owe the remaining $55,000 at closing, along with closing costs.
Negotiating earnest money terms
The amount and terms are negotiable. You can offer less earnest money if the market is slow or if you include strong contingencies. You can also negotiate the timeline — for example, asking that earnest money not be due until after the inspection, or that it be held in a non-interest-bearing account rather than one that earns interest for the seller.
In a hot market, sellers may refuse to negotiate and may reject offers with low earnest money or weak contingencies. In a buyer's market, you have more leverage. Your real estate agent can advise you on what is reasonable in your area and what the seller is likely to accept. The key is understanding what you are agreeing to before you wire the money.
Frequently Asked Questions
What if I lose my job after I put down earnest money but before closing?
If your purchase agreement includes a financing contingency, a job loss that causes your lender to deny the mortgage may allow you to recover your deposit. You will need a letter from your lender stating the loan was denied due to the job loss. If you have already been cleared to close and the lender does not deny the loan, losing your job after that point typically does not protect your deposit.
Can the seller keep my earnest money if the appraisal is low?
Only if your contract does not include an appraisal contingency, or if you waived it. If your contract includes an appraisal contingency and the home appraises for less than the purchase price, you can usually cancel and recover your deposit. Some contracts allow the seller to lower the price instead, giving you the choice to accept or walk away.
What if the seller and I disagree about whether I have the right to my deposit back?
The escrow agent will hold the funds while you and the seller resolve the dispute. You can try to reach agreement through your real estate agents, or you may need to involve an attorney. Some states allow either party to file a lawsuit to determine who gets the money, though this is expensive and slow.
Do I get interest on my earnest money?
It depends on the contract and state law. Some escrow accounts earn interest, which may go to you, the seller, or be split. Others are non-interest-bearing. You can negotiate this when you make your offer, though most sellers do not care about interest on small deposits.
Can I wire earnest money directly to the seller?
No. Wiring directly to the seller defeats the purpose of earnest money — it removes the neutral third party and puts your money at risk. Always wire to the title company, escrow agent, or real estate brokerage handling the transaction. Verify the wire instructions in writing before sending money.