What Is Earnest Money? (And Why Sellers Want It)
Earnest money is a good faith deposit you make when your offer is accepted. It shows the seller you're serious and compensates them if you back out without a valid reason.
🎯 Key Points:
- ✅ It's NOT an extra cost—it's applied to your down payment at closing
- ✅ It's held in escrow by a neutral third party (not the seller)
- ✅ It's refundable IF you back out for a covered reason
- ✅ It protects the seller from buyers who waste their time
⚠️ Important Distinction
Earnest money ≠ Down payment. Earnest money is a small deposit made when your offer is accepted. Your down payment is the larger amount paid at closing. Your earnest money becomes PART of your down payment.
How Much Earnest Money Should You Put Down?
| Home Price | 1% (Low) | 2% (Typical) | 3% (Competitive) |
|---|---|---|---|
| $250,000 | $2,500 | $5,000 | $7,500 |
| $350,000 | $3,500 | $7,000 | $10,500 |
| $400,000 | $4,000 | $8,000 | $12,000 |
| $500,000 | $5,000 | $10,000 | $15,000 |
| $750,000 | $7,500 | $15,000 | $22,500 |
📈 When to Go Higher (3-5%)
- • Hot seller's market with multiple offers
- • You really want THIS specific house
- • You're competing against cash buyers
- • The seller is choosing between similar offers
📉 When 1-2% Is Fine
- • Buyer's market with low competition
- • Home has been on market 60+ days
- • You're the only offer
- • You have strong contingencies you need
🛡️ The 4 Contingencies That Protect Your Deposit
Contingencies are your safety net. They let you back out AND get your earnest money back if certain conditions aren't met.
1. Inspection Contingency
Allows you to back out if the home inspection reveals major issues.
Typical deadline: 7-14 days after acceptance
Protects you from: Foundation issues, roof damage, electrical problems, mold, etc.
2. Financing Contingency
Allows you to back out if you can't get mortgage approval.
Typical deadline: 21-30 days after acceptance
Protects you from: Loan denial, rate changes, job loss during process
3. Appraisal Contingency
Allows you to back out if the home appraises for less than the purchase price.
Typical deadline: 14-21 days after acceptance
Protects you from: Overpaying for a home, needing extra cash at closing
4. Home Sale Contingency
Allows you to back out if you can't sell your current home first.
Typical deadline: 30-60 days
Note: Sellers often reject offers with this contingency in competitive markets
🏠 Get Pre-Approved Before You Make an Offer
A pre-approval letter makes your offer stronger and protects your financing contingency.
Get Pre-Approved Today →❌ When You LOSE Your Earnest Money
You forfeit your earnest money to the seller if:
- ❌You back out after contingency deadlines have passed
- ❌You waived contingencies and then can't close
- ❌You simply change your mind ("cold feet")
- ❌You miss contractual deadlines without extensions
- ❌You fail to act in good faith during the process
⚠️ Real Example: How Buyers Lose Earnest Money
Scenario: Buyer has a 10-day inspection contingency. Inspection reveals minor issues. Buyer doesn't formally request repairs or cancel within 10 days. On day 15, buyer decides to back out because they found a "better" house. Result: Buyer loses $10,000 earnest money.
✅ When You GET Your Earnest Money Back
You get your earnest money refunded if:
- ✅Inspection reveals major issues and you cancel within the deadline
- ✅Your mortgage is denied and you have a financing contingency
- ✅Appraisal comes in low and you have an appraisal contingency
- ✅The seller can't deliver clear title
- ✅The seller backs out or breaches the contract
- ✅You close on the home (it becomes part of your down payment)
Frequently Asked Questions
How much earnest money should I put down?
Typically 1-3% of the purchase price. In competitive markets, 3-5% may strengthen your offer. On a $400,000 home, expect $4,000-$12,000. Put down enough to show you're serious, but only what you can afford to have tied up.
Is earnest money refundable?
Yes, IF you back out for a reason covered by your contingencies (inspection, financing, appraisal) and within the deadlines. If you back out for other reasons or after deadlines pass, you typically lose it.
What happens to earnest money at closing?
It's applied to your down payment and closing costs. It's not an additional expense—it's money you were going to pay anyway, just paid earlier as a deposit.
Who holds the earnest money?
A neutral third party—usually the title company, escrow company, or real estate brokerage. The seller does NOT hold it directly. This protects both parties.
🏠 Ready to Make an Offer?
Get pre-approved first so your offer is taken seriously and your financing contingency is solid.
Get Pre-Approved Today →Related Guides
Emily Chen
Real Estate Transaction Specialist • 8+ Years Experience
Emily has guided hundreds of buyers through the offer process and helped them protect their earnest money deposits.