Buying a home comes with lots of moving parts. One of the first ones in the process? Putting down an earnest money deposit demonstrating the buyer's commitment to the transaction and sometimes influencing seller negotiations. Since purchasing a home typically involves hundreds of thousands of dollars, earnest money serves as an important safeguard for both parties but raises more questions than answers for many buyers: How much is enough? Where does the money go? What happens to the money if the deal doesn’t close? This guide unpacks the ins and outs of earnest money so you’ll know exactly what to expect when it’s time to make an offer and show you’re serious about purchasing a property.

What is earnest money?

Earnest money is a deposit you make when submitting an offer on a home, signaling to the seller you’re serious about buying and willing to put funds on the line to back up your offer. A gesture of good faith, it helps reassure the seller that you won’t simply walk away without consequences.

· Typical amount: Usually 1%–3% of the home’s purchase price, this amount can also go as high as 5%–10% in competitive markets.

· Where it goes: The money is held in an escrow account until closing.

· What happens at closing: If the deal goes through, the earnest money is applied toward the home purchase at closing (typically as a credit toward the down payment and/or closing costs).

Essentially, earnest money is not an extra fee but simply a way to demonstrate commitment early on in the process—the amount determined based on the home's purchase price, current market conditions, and buyer-seller negotiations.

Why do buyers pay earnest money?

Imagine you’re selling your home. The moment you accept an offer, you’re essentially pressing pause on other potential buyers while awaiting inspections, appraisals, and financing and simultaneously comparing said offer to those from other buyers. A strong earnest money deposit can help the first offer stand out in a crowd during a waiting period that often feels risky; what happens if the buyer changes his or her mind?

That is precisely where earnest money comes in, helping to reassure the seller by:

1. Showing a buyer is serious: It proves the buyer isn’t just window-shopping but instead committed to moving forward.

2. Protecting the seller financially: If the buyer backs out without a valid reason, the seller can keep the deposit as compensation for lost time and missed opportunities.

3. Strengthening the offer: In hot markets, a larger earnest money deposit (along with extra money or fewer contingencies) can help set an offer apart from competing bids.

From the buyer’s side, earnest money also shows lenders you’re financially ready to take on the purchase and thus makes the loan-approval process that much smoother.

How much earnest money do you need?

While the exact amount varies by market, seller expectations, and the home’s competitiveness, here’s what’s typical (as briefly mentioned earlier):

Standard range

Most buyers put down 1% to 3% of the purchase price (e.g., between $3,000 and $9,000 for a $300,000 home).

Hot markets

In neighborhoods where homes receive multiple offers (sometimes within hours), buyers often go higher. Five to 10% is not unusual here (e.g., anywhere from $25,000 to $50,000 for a $500,000 home).

Your real estate agent can help you read the room, knowing some sellers spell out exactly what they expect in the listing while others leave it open for negotiation.

Pro tip: Aim for a sweet spot. You want your deposit to show real commitment without draining your savings; while putting down too little might weaken your offer, the opposite could leave you strapped for cash when you need it most.

How does earnest money work?

Think of earnest money as the bridge between making an offer and officially buying a home. The process usually unfolds as follows:

1. Making the offer

When you decide on a home and submit your purchase offer, you’ll include (or agree to provide) the earnest money deposit.

2. Putting funds into escrow

If the seller accepts your offer, the deposit doesn’t go directly into his or her pocket and is instead placed in a neutral third-party escrow account often held by a title company, escrow company, or real estate brokerage (protecting both you and the seller).

3. Pushing the deal forward

With your earnest money secured, the home comes off the market to kick off other key steps in the process: inspections, appraisal, securing a mortgage, and ironing out any last-minute negotiations. The earnest money reassures the seller during this waiting period.

4. Getting to closing day

If everything checks out, your earnest money is credited back to you and typically applied to your down payment or closing costs to reduce what you owe on settlement day.

In short, earnest money works quietly behind the scenes to keep your deal on track and your spot in line secure.

When your earnest money is at risk

While earnest money is usually credited back to you at closing, circumstances where you could otherwise forfeit your deposit include…

Backing out of the deal in the absence of a contingency clause
Failing to meet purchase contract deadlines
Having a sudden change of heart after the seller already took the home off the market

Nevertheless, you can typically get this money back if…

The home inspection reveals major issues, and you have an inspection contingency.
The appraisal comes in lower than the purchase price, and you have an appraisal contingency.
Your mortgage application is denied, and you have a financing contingency.

· The seller terminates the agreement for any reason.

· You are unable to sell your existing home or decide to purchase a different property, and your contract includes a contingency for these situations.

Some of the most common contingencies found in real estate contracts include the home inspection, property appraisal, and financing contingencies: all serving to protect the buyer by allowing you to recover the earnest money per certain conditions (e.g., issues found during a professional home inspection, the property not appraising for the agreed-upon price, or an inability to secure financing). Contingencies related to the sale of an existing home or the decision to purchase a different property are also frequently included to manage risks during the transaction.

This is why contingencies matter, protecting both your earnest money and ability to walk away if something isn’t right.

Earnest money vs. down payment

A common point of confusion is how earnest money differs from a down payment. Let’s compare and contrast them to clear this up:

The key takeaway? Earnest money is essentially like a placeholder as an upfront sign of commitment. The down payment, on the other hand, is the actual (large) sum you’ll need to secure your mortgage.

Is earnest money required?

Technically, no law exists saying you must put down earnest money to buy a home. Legal requirements or regulations in some jurisdictions, however, dictate how this is handled via escrow management and deposit deadline rules. Sellers almost always expect this deposit in practice, especially in today’s housing market where multiple offers are common—making your offer look half-hearted compared to buyers willing to put real money on the table if you fail to pony up.

That said, the amount is negotiable, and sellers may accept a smaller deposit or occasionally none in slower markets where homes linger on the market (such situations are rare, however). Think of it this way: earnest money is less about following a hard-and-fast rule and more about matching the pace of the local market. In a bidding war, it’s almost essential. In a quiet market, it might be flexible. Either which way, your real estate agent can help you strike the right balance so you look serious without overcommitting.

Where does earnest money go if the deal falls through?

If the seller cancels: You’ll typically get your earnest money back.

If the buyer cancels for valid reasons (per contingencies): You’ll also get your money back.
If the buyer cancels without a valid reason: The seller keeps the deposit as compensation for lost time.

If a title search uncovers issues with the property's title during the closing process, this can impact whether the deal moves forward and determine if the earnest money is refunded or forfeited. Always read your purchase agreement carefully and ensure it spells out conditions dictating a refundable deposit.

How to protect your earnest money

With thousands of dollars are at stake, it’s crucial to safeguard your deposit. Here’s how:

Work with a trusted real estate agent who understands local norms.
Use an escrow account managed by a neutral third party, never handing money directly to the seller.
Get everything in writing in the purchase contract, including contingencies.
Meet deadlines for inspections, financing, and closing.
Stay in close communication with your lender to avoid financing surprises.

Final thoughts on earnest money

Earnest money might seem like just another task on a long list of homebuying to-dos, but it carries more weight than you might think—telling the seller “I’m serious about this home and ready to move forward.” The best part? That money doesn’t disappear into thin air. So long as you meet the terms of your contract, it will come back to you at closing and applied toward your down payment or closing costs. In other words, it’s not a fee but instead a commitment that doubles as an investment in a future home. Handled wisely, it’s the first real step you can take from dreaming about a house to actually making it yours.

Have questions about the home-buying process? Schedule a free consultation with one of our CFP® professionals to get them answered.

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What is earnest money?

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