What Is Earnest Money? A Homebuyer’s Guide to Good Faith Deposits

When buying a home, you’ll likely come across the term earnest money, also known as a good faith deposit. For many first-time buyers, it can feel confusing or even intimidating. But earnest money plays an important role in showing your commitment to a real estate transaction and protecting both you and the seller.

This guide explains what earnest money is, how it works, and why it matters.

What Is Earnest Money?

Earnest money is a deposit made by a buyer to demonstrate their serious intent to purchase a property. It’s essentially a promise in financial form that says, “I’m committed to following through on this deal.”

The money is typically paid shortly after the seller accepts the buyer’s offer and is usually held in an escrow account by a title company, attorney, or real estate brokerage.

How Does Earnest Money Work?

Here’s a step-by-step look at how earnest money fits into a home purchase:

1. Offer Accepted – Once a buyer and seller agree on the purchase terms, the buyer submits earnest money.

2. Deposit Held in Escrow – The deposit goes into a neutral escrow account, not directly to the seller.

3. Conditions Met – If inspections, appraisals, and financing go smoothly, the purchase proceeds to closing.

4. Applied to Costs – At closing, the earnest money is applied toward the buyer’s down payment or closing costs.

If the deal closes, the deposit isn’t an extra cost—it goes toward what the buyer owes at settlement.

How Much Is Earnest Money?

The typical earnest money deposit is 1% to 3% of the home’s purchase price, though this varies by market conditions and local customs.

• In a competitive seller’s market, higher deposits can make an offer stand out.

• In a slower market, smaller deposits may be more common.

For example, on a $300,000 home, you might expect to provide $3,000 to $9,000 in earnest money.

Is Earnest Money Refundable?

Earnest money can be refundable if the contract includes contingencies that aren’t met, such as:

• Home Inspection Contingency – Buyer can walk away if major issues are uncovered.

• Financing Contingency – Refunds if the buyer’s loan doesn’t get approved.

• Appraisal Contingency – Refunds if the property appraises for less than the offer price.

However, if the buyer backs out without a valid reason, the seller typically keeps the earnest money as compensation for lost time and opportunities.

Why Is Earnest Money Important?

Earnest money protects both parties:

• For the buyer: It shows sellers you’re serious about buying.

• For the seller: It discourages buyers from backing out without reason.

• For both parties: It creates trust and ensures both sides are invested in moving toward closing.

  
  

Tips for Buyers Offering Earnest Money

• Discuss with your real estate agent the typical amount for your market.

• Make sure the contract clearly outlines refund conditions.

• Always use a secure escrow account—never pay earnest money directly to a seller.

• Understand how the deposit will be applied to your final costs at closing.

Earnest money is not an extra fee—it’s a sign of trust. By putting down a deposit, buyers signal commitment, while sellers gain peace of mind knowing the buyer intends to move forward. As long as contingencies and agreements are respected, earnest money becomes part of your investment in the home, not money lost.

If you’re preparing to buy a home, talk to your real estate professional about how much earnest money is customary in your area and how it will be handled during escrow.