Earnest Money: What It Is and Why It Matters in Real Estate Deals

What Is Earnest Money in Real Estate?

Earnest money is a good faith deposit a buyer provides when making an offer on a home. It signals to the seller that the buyer is serious about purchasing the property and willing to put money on the line.

Typically, earnest money amounts range from 1% to 3% of the home’s purchase price, but this can vary depending on the market and negotiation.

How Earnest Money Works

Once the buyer and seller agree on the terms, the earnest money is deposited into an escrow account; held by a neutral third party until closing. This keeps the funds safe and ensures they’re applied correctly.

If the deal goes smoothly, the earnest money is usually applied toward the buyer’s down payment or closing costs. If the sale falls through under agreed contingencies, the buyer often gets this money back.

Why Earnest Money Benefits Buyers and Sellers

For buyers, earnest money strengthens their offer by demonstrating commitment. It helps sellers weed out casual or non-serious buyers who might waste time or cause delays.

Sellers gain reassurance that the buyer is invested financially and motivated to close, reducing the risk of a deal falling apart at the last minute.

When Can Earnest Money Be Forfeited?

Earnest money isn’t always refundable. If the buyer backs out without a valid reason outlined in the contract—such as failing to secure financing or waiving contingencies; they risk losing the deposit.

It’s important for buyers to understand the contract terms fully and keep communication open throughout the process to avoid surprises.

Tips for Handling Earnest Money Smartly

Buyers should work with their real estate agent and attorney to clarify how much earnest money to offer and under what conditions it’s refundable.

Sellers should ensure earnest money is held securely in escrow and that contract terms protect their interests. Clear agreements help prevent disputes and keep transactions on track.