What Is Earnest Money in Real Estate?

Typical earnest money amount | How earnest money works | Next steps

In real estate, earnest money is a cash deposit made by a home buyer to show a seller they’re serious about making an offer on a home. Earnest money protects home sellers from flaky buyers and can help buyers make more appealing offers.

If the house goes under contract, the earnest money deposit will go into a third-party escrow account until closing.

• If the deal closes, that money goes toward down payment or closing costs.
• If the deal falls through because the seller backs out or because a contract term wasn't met, the buyer gets their earnest money back.

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How much is a typical earnest money deposit when buying a house?

A typical earnest money deposit will be 1% to 2% of the house price.

In some cases, though, you’ll end up offering more earnest money. Take market temperature, for instance. In competitive markets, buyers often offer earnest money deposits up to 5%. It also depends on what kind of property you buy. Existing properties usually have lower earnest money deposits than new construction―think 1% to 2% on existing homes versus 5% to 10% on new homes.

Location matters too. Hot urban markets like New York City see earnest deposits up to 10%, while cooler rural markets stick closer to 1%. Home sellers also may accept lower earnest money deposits from cash buyers.

Don’t worry, though — you don’t have to figure out how much earnest money to offer on your own.

A good real estate agent will know the norms of your area and the current market situation. With your agent’s help, you can find the sweet spot for your earnest money deposit: a competitive amount that improves the odds of having your offer accepted but that doesn’t require you to overpay.

Will putting down more earnest money make my offer more competitive?

Putting down more earnest money can definitely make a home offer more competitive. But factors like your purchase price, closing timeline, and contingencies will also affect whether or not your offer gets accepted.

If a seller is comparing identical offers from you and another potential buyer, you offer more earnest money, there’s a good chance your offer will win out.

That said, if you offer a lot of earnest money but you also include lots of contingencies, a seller might choose an offer with a lower deposit but also fewer deal-breakers.

Is earnest money required? What if I don’t have enough cash?

While earnest money isn't legally required, it is the norm, and most sellers do expect deposits as part of a home offer. So if you can offer earnest money, you probably should.

Without an earnest money deposit, you can back out of a deal for any reason, leaving the seller hanging. So most sellers will simply wait to get an offer that includes earnest money.

If you don’t have enough cash on hand for earnest money, consider applying for a down payment assistance program.

Is earnest money refundable?

In a successful deal, earnest money will go toward your purchase. Buyers can get earnest money refunded if:

• One or more of the contingencies in the contract aren't met by a certain deadline.
• The seller breaks things off.

Contingencies are situations that let you back out of a deal without penalty.

Some common contingencies:

How does earnest money actually work?

Earnest money works in three phases:

1. You submit an offer on a house with a proposed earnest money amount. The seller will either counter or accept your offer. Note: You won’t actually send over any money yet.
2. Once you sign your negotiated purchase agreement, you’ll pay the earnest money into a third-party escrow account. It will stay there until closing (or until the deal gets called off).
3. At closing time, your earnest money will go toward closing costs or your down payment.

When is earnest money due?

Earnest money is due after you sign a purchase agreement, when the house goes under contract. Typically you’ll have one to three days to send the money. Your purchase agreement will include a specific time frame.

If you miss the deadline, the contract is void and the seller can back out or accept a different offer instead. In many cases, though, your agent can help you smooth things over.

How to pay earnest money

While your earnest money will end up going to the seller, you should never simply hand cash over to them. Instead, you’ll pay it to a third party. That party will hold the money in an escrow account until closing.

The home seller usually chooses this third party account holder. But as a buyer, you should still make sure it’s a reputable company with regulated escrow accounts. And if you have any doubts, work with your agent to negotiate an alternative escrow holder.

You can use a few different methods to deposit your earnest money with the escrow account holder:

However you send the earnest money, make sure you get a receipt for your payment.

What happens to the earnest money while the deal is pending?

While your house purchase is pending, your earnest money will stay in an escrow account.

In this case, that means a third party (usually a title company, escrow company, law firm, or real estate brokerage) will hold the money in a designated account for safekeeping until closing. Neither the buyer nor the seller can take the money and run.

The escrow company will make sure the earnest money gets paid out by the terms of your purchase agreement ― whether that’s to the seller at closing or back to the buyer in case of a contingency.

Next steps: Gearing up to buy a home?

Now that you know how an earnest money deposit works, you’re ready to take the next steps for buying your first house.

You can start by comparing lenders and shopping around for the best interest rates. In most cases, you’ll want to prequalify for a mortgage loan before you start looking at houses. If you have any concerns about your ability to afford a home or qualify for a mortgage loan, talk with a financial advisor to figure out the best way to proceed ― and don’t forget to familiarize yourself with conventional loan requirements.

You’ll also want to find a top-notch real estate agent. They’ll show you homes, prepare home offers, and (of course) guide you to the right earnest money deposit amount to help you get your dream home.