What Is Earnest Money in Real Estate?

Earnest Money Deposits When Buying a House

Earnest money is money you put down to show a seller you are serious about buying a home. (Earnest money is also called a “good faith deposit.”) You typically put down this money when you make an offer on a house.

Your earnest money is usually kept in an escrow account until the sale of the home closes and then applied to your down payment or closing costs. There are also times when you may be able to get your earnest money refunded if the sale of the home does not close. Read on to learn more about earnest money.

Why Do You Need to Pay Earnest Money?

When homeowners accept a bid, they take the house off the market until the sale of the home closes. If the sale does not close, the homeowner can lose time and money putting the house back on the market and finding another buyer.

Earnest money helps demonstrate you are committed to buying the house and will make a good faith effort to ensure the sale closes. It is possible the seller may get to keep your earnest money if the sale of the house does not go through. (See the section, “Is earnest money refundable?” below for more information about when a seller may be able to keep your earnest money.)

How Much Earnest Money Should You Put Down?

Earnest money deposits frequently range between 1% and 5% of the sale price of the home according to U.S. News and World Report . This means that if you want to buy a $300,000 house, you might need to make an earnest money payment between $3,000 and $15,000.

There is no hard-and-fast rule on how much your earnest money deposit should be. In a market where sellers may receive multiple offers on their houses, a higher deposit may make your bid more attractive, however.

Is Earnest Money Refundable?

Your earnest money deposit may be refundable if you attach contingencies in writing to your offer to buy a house. Contingencies define conditions that need to be met before the sale closes.

One common contingency is that the home appraisal shows that the fair market value of the house is not lower than a certain price. Another common contingency concerns the title search. A title search confirms the seller is the legal owner of the house and there are no liens or claims on the property that might affect your decision to buy a house.

Homebuyers often make their offer contingent on the results of a home inspection not finding structural issues or problems that require expensive repairs. This contingency might allow you to renegotiate the sale price or withdraw your offer and have your earnest money refunded.

Homebuyers may make their offer contingent on selling their current home or getting approved for a new mortgage too. With contingencies like these, your earnest money may be refundable if the conditions defined in your offer are not met. Learn more about contingencies when buying a house.

Can Earnest Money Go Toward Your Down Payment or Closing Costs?

Yes. When the sale of a home closes, your earnest money is typically applied to your down payment or closing costs. The company managing the escrow account holding your earnest money often makes sure your earnest money is paid to the right organization during closing.

Last reviewed and updated May 2024 by Freedom Mortgage.