What Is Earnest Money?

How Does Earnest Money Work?

The primary purpose of earnest money is to protect the seller from wasting time and missing potential offers if they pull their home off the market and the buyer subsequently backs out of the deal. In return, the seller removes the home from the market until the sale is complete.

You're not legally required to put down earnest money on a home purchase, but if you do and the seller rejects your offer, the deposit is returned to you. If your offer is accepted, your funds are deposited into an escrow account where they remain until closing. Then, the deposit is applied to your down payment or closing costs.

You'll typically get your money back if you cancel under a contract contingency, such as those for a home inspection or loan approval. But if you back out for a reason your contract doesn't cover, the seller may keep your deposit.

Learn more: Can You Back Out of a Home Offer?

How Much Is Earnest Money?

Earnest money deposit amounts vary by region but typically range from 1% to 3% of the sale price. Ask your agent what's standard in your local area and whether offering a higher amount is a smart move.

In a competitive market, deposits can run as high as 10% for buyers looking to make their offer stand out. If you already plan to make a 10% down payment, you might move more of that money upfront as part of your earnest money. Remember, the deposit is added to your down payment at closing, so you're not paying more—you're just paying more of it earlier.

Example: Say you offer $400,000 on a home and plan on submitting a 10% down payment of $40,000. You could strengthen your offer with a 5% earnest money deposit, or $20,000. That amount is credited toward your down payment or closing costs. So, the total down payment is still $40,000, but paying more of it upfront may strengthen your offer.

Earnest Money vs. Down Payment

Your earnest money and down payment are both cash you provide out of pocket to buy a home. However, these payments are distinctly different. Here's how:

Learn more: The Complete Guide to Closing on a House

Is Earnest Money Refundable?

Earnest money is usually refundable if the seller rejects your offer or you cancel because a contingency wasn't met. But if you simply change your mind about buying the house and withdraw your offer, the seller is entitled to keep your good-faith deposit. In that case, the earnest money gives the seller some financial compensation for their time off the market and to relist the property.

When you can usually expect a refund:

• Contingencies aren't met: The seller fails to complete actions agreed upon as contingencies of the sale, such as making promised repairs, replacing or leaving certain appliances in place, removing undesired material from the property, and so on.
• Problems arise from the inspection: The home inspection uncovers a defect that adversely affects the home's integrity or market value.
• Title search turns up one or more liens: The seller usually must clear liens before selling the house. Some liens can be settled after closing, in which case there'd be no need to halt the sale.

When you may lose your earnest money:

• No financing or appraisal contingency: If you're unable to obtain the financing needed to complete the purchase, you won't get your earnest money back. An appraisal contingency can protect you if the appraisal comes in below your offer price and the lender doesn't approve the full amount.
• No home sale contingency: Unless you have this contingency, which allows you to back out of an offer if you're unable to sell your current home, you won't get a refund if you can't sell your home and you're forced to back out of your home offer.
• Inspection contingency: If your agreement does not include an inspection contingency and you cancel because the inspection reveals major defects, you could lose your earnest money deposit.

Tip: Your agent may suggest waiving contingencies to help you win a bidding war, but understand that this may put your deposit at risk. If losing the deposit would set you back on a future offer, think twice before giving up those protections.

How to Get Earnest Money Back

Consider these tips to help ensure your earnest money is returned to you if your home purchase falls through.

• Understand your contract. Your contract sets the rules for your purchase and your deposit. Before you sign anything, ask your agent or title professional to clarify any terms you don't understand so you don't risk your deposit.
• Include protective contingencies. Make sure your purchase offer includes contingencies for financing, the appraisal and the home inspection. If these contingencies aren't met, you can usually cancel under the contract and get most or all of your earnest money back.
• Track the contract deadlines. Purchase contracts commonly include deadlines for obtaining financing and meeting other contingencies. Plan ahead to make sure you can complete required steps on time so you don't lose your money. For example, it's a good idea to get preapproved for a mortgage before house shopping and have the required documents ready so your mortgage approval doesn't hold up the process.
• Work with reputable professionals. Having an experienced homebuying team including a real estate agent and/or an attorney can work on your behalf to protect your interests throughout the transaction. Remember, mortgage, title and escrow companies can explain the process and required forms, but they can't give you legal advice.
• Look for an earnest money guarantee. Shop and compare mortgage offers from at least three lenders. Ask each how they can help you protect your earnest money deposit. Some even offer a deposit guarantee.

The Bottom Line

Earnest money is a deposit that accompanies your purchase offer on a home. You don't have to submit one, but doing so demonstrates you're a serious buyer and reduces the seller's risk you'll back out of the deal. This good-faith deposit is held in escrow until closing, and if all goes as planned, it's credited to your down payment or closing costs.

The sale could fall out of escrow for various reasons, including if you fail to secure adequate financing. If your credit score isn't where you'd like it to be, you can boost your odds of approval by taking steps to improve your credit. You should also check your credit report and FICO^® Score^Θ for free from Experian to see where your credit stands and spot potential issues you can fix before applying.