Earnest Money

How Earnest Money Works in a Real Purchase Offer

Earnest money sits at the intersection of costs, risk, and negotiation. It is not an extra fee on top of the purchase price. Instead, it is an early slice of the money you are already planning to use for your down payment and closing costs.

Here is how it typically fits into a transaction:

• Amount: Commonly 1–3% of the agreed purchase price, though it can be higher in very competitive markets or lower in slower markets.
• Timing: The deposit is usually due shortly after the seller accepts your offer and both sides sign the purchase agreement. Some contracts require it upon offer submission.
• Where it is held: The funds are placed in an escrow account controlled by a neutral third party, following the terms of the contract.
• How it is documented: The contract will spell out the exact amount, due date, who holds the funds, and the conditions under which the money is released, refunded, or forfeited.

Because earnest money is part of your overall cash to close, it affects how you plan your total costs and liquidity. You need enough available cash to fund this deposit early in the process while still reserving money for inspections, appraisals, moving expenses, and the remainder of your down payment.

From the seller's perspective, a meaningful earnest money deposit reduces the risk of tying up their property with a buyer who is not serious or financially prepared. From the buyer's perspective, the deposit can strengthen the offer, especially when competing against other buyers, as long as the contract includes clear protections.

When Earnest Money Is Refunded, Forfeited, or Applied at Closing

The core risk with earnest money is whether you will get it back if the transaction does not close. That outcome is governed by your contract, especially the contingencies and deadlines. Understanding these mechanics helps you treat earnest money as a managed risk rather than a mystery fee.

Common situations where earnest money is typically refunded

• Inspection contingency issues: If an inspection uncovers significant problems and your contract gives you the right to cancel or renegotiate within a defined period, you can usually exit and receive a refund.
• Financing contingency failure: If you cannot secure financing on the agreed terms despite making a good‑faith effort, a financing contingency often allows you to cancel and recover your deposit.
• Appraisal contingency issues: If the property appraises below the purchase price and the seller will not adjust the price or terms as allowed by the contract, this contingency can allow you to walk away with your earnest money.
• Title or seller default: If a title problem cannot be resolved, or the seller fails to perform under the contract, buyers are commonly entitled to a full refund.

Situations where earnest money may be forfeited

• Missing deadlines: Failing to act within the time frames in your contract (for example, not sending a written cancellation before a contingency deadline) can put your earnest money at risk.
• Canceling for a non‑approved reason: Simply changing your mind, deciding on another property, or experiencing buyer's remorse without contractual protection can lead to forfeiture.
• Breaching other contract terms: Ignoring agreed conditions, such as failing to provide required documentation or deposits, can be treated as a breach that allows the seller to keep the money.

What happens to earnest money at closing

If the transaction closes, earnest money is almost always credited back to you:

• Applied to your down payment: The deposit reduces the remaining cash you need to bring to closing for your down payment.
• Applied to closing costs: Depending on how the contract and closing documents are drafted, some or all of the deposit can offset closing costs instead.

To protect yourself, focus on three things: negotiate a deposit size that reflects both your comfort level and local norms, insist on clear written contingencies and timelines, and keep track of every deadline in the contract. Treated this way, earnest money becomes a strategic tool to secure a property, not an unpredictable cost.