Is earnest money part of the down payment?

Written by Bill MacDonaldSeptember 14th, 20222 minute read

Home buyers at settlement

The big day is here. You jumped through the lender's hoops, and you're about to sign the closing papers, but you have one more question, what about the earnest money that you handed over to the real estate agent when you signed the sales contract?

The earnest money was held by either the home seller or a third party company, such as a title company or a real estate agent's firm. At settlement, the earnest money is applied to the closing expenses or the down payment.

The earnest money is returned to the home buyer if the sales contract is cancelled for a legitimate reason; but, if the contract conditions are not fulfilled and the home buyer defaults on the sales contract, the earnest money may be lost and given to the seller.

Common contingencies include:

  • Low appraisal valuation
  • Loan approval
  • Home inspection
  • Existing home sale

Earnest Money: Frequently Asked Questions

Q. Can earnest money be a personal check?
A. Yes, but, as with most things in life, there can be exceptions.

Q. Does earnest money go towards a down payment?
A. The earnest money can be applied to the down payment, closing costs, or prepaid costs (i.e. per diem interest, property taxes, etc.).

Q. How much should earnest money be?
A. There is no set rule for the earnest money amount. The seller/real estate agent may request a percentage of the sales price from 1% to 3%, or the earnest deposit could be a fixed sum of money.

Q. Is earnest money part of closing costs?
A. Earnest money is not a component of closing costs.

Q. Is earnest money required?
A. Technically, earnest money is not required, however, most home sellers will require an earnest money deposit.

Q. What is the purpose of earnest money in a real estate transaction?
A. The earnest money deposit shows the seller that you're serious about purchasing the home.

Q. When is earnest money cashed?
A. The escrow deposit is usually cashed within a day or two or as stated in the sales contract.

Q. Who gets the earnest money?
A. The earnest money is held in the real estate company's escrow account or with the escrow company.

Q. Who holds the earnest money in a for sale by owner?
A. It's common to have either the escrow agent or title insurance company to keep the earnest money until all the sale conditions are met.

Q. Who determines earnest money amount?
A. The amount of the earnest money is a decision between the home seller and home buyer, although the amount is usually established between the buying and selling real estate agents.