What is earnest money, and when can you get it back?

Earnest about claiming your dream home? Prepare to put down an earnest money deposit, which demonstrates that you are serious about purchasing a property.

Earnest money on a house usually amounts to a small percentage of the purchase price, but the funds are at risk until the transaction closes.

If this is your first home purchase, it’s natural to have questions: Exactly what is an earnest money deposit? How does earnest money work, and what will you need to put down? What happens to earnest money at closing? And when is it refundable? 

What is earnest money?

Earnest money is a good-faith deposit that a home buyer puts down after their offer is accepted by the seller. It shows that the buyer is serious about purchasing the home.

Most real estate contracts/purchase agreements require that the buyer pledge a good-faith deposit. The seller can suggest a particular amount, but this sum can be negotiated between the buyer and seller, and the agreed-upon amount will be stipulated in the contract/agreement. Once that is signed, the deposit is legally binding.

These funds are typically held in an escrow account by an escrow or title company, attorney, real estate broker, or other neutral third-party while the buyer works through inspections, financing, and other steps before closing. If the deal proceeds, the earnest money is credited toward the buyer’s costs at closing.

But if the deal falls through, the seller gets to keep the earnest money, unless certain conditions are met in the purchase offer.

“Earnest money is a buyer’s way of saying, ‘take my offer seriously, and if I back out without a good reason, you keep the dollars,’” says Todd Christensen, a housing counseling and education manager.

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How much is earnest money?

The amount of earnest money required by the seller will vary depending on market conditions and expectations in the area.

“Earnest money often equates to only around 1% to 3% of the purchase price, which gives the buyer skin in the game – since it’s usually the only amount of money they have at risk until the purchase closes,” says Michael Soon Lee, a broker associate with RE/MAX Gold. “Let’s say you agree to purchase a property for $500,000; a 3% earnest money deposit in this example would be $15,000.”

But in a more competitive market, the seller can demand more than 3% of the purchase price as earnest money.

“The amount could be as little as $100, or as much as $100,000, or even the entire purchase price,” says Realtor Bruce Ailion. “I’ve had separate buyer clients who have paid all three of these examples. In a competitive market situation, putting down more earnest money can assist in winning the transaction.

However, buyers may want to deposit as little as possible because unexpected things can happen. For example, you might find a property you like much better, in which case you may need to forfeit earnest money to buy the better property.”

What happens to earnest money at closing?

At closing, earnest money is typically applied toward your down payment or closing costs.

“It’s not an additional fee, but rather money that you have already contributed to the transaction,” notes Taylor Kovar, a Certified Financial Professional.

Using the previous $500,000 purchase example, making a 20% down payment means putting down $100,000 and obtaining an 80% loan for $400,000. In this case, your $15,000 earnest money deposit would be credited against the down payment – resulting in a balance due at closing of $85,000, not including closing costs.

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Is earnest money refundable?

Fortunately, a good-faith deposit is fully refundable, although certain conditions have to be met. Let’s delve deeper into when you can and cannot get your earnest money reimbursed.

When buyers can get their earnest money back

In many purchase and sale agreements, the buyer’s earnest money deposit is protected by certain conditions, and the seller cannot keep that deposit unless those conditions are met.

“Earnest money can be refundable if the buyer cancels the contract based on a contingency outlined in the contract. Typical contingencies include negative findings during a home inspection, the appraisal coming back much higher than expected, or the borrower being unable to secure financing,” Christensen continues.

When buyers may lose their earnest money

However, once the contingencies stated in the purchase agreement have been fulfilled or waived, “if a buyer then fails to complete the transaction, the earnest money will be paid to the seller as liquidated damages,” Ailion says.

This can happen if you back out of the deal after contingencies have expired, or if you cancel for a reason not protected by the contract.

“In those cases, the seller may be entitled to keep the deposit in full,” says Kovar.

How to protect your earnest money deposit

To safeguard your good-faith deposit funds, it’s best to partner with a trusted real estate agent.

“Work with a professional who understands your situation and places all of the necessary contingencies into your purchase agreement,” Lee recommends. “A good agent will make sure their client does not give up their earnest money until they know the contingencies are satisfied."

The challenge here is that the more contingencies you place into your purchase agreement, the less likely the seller is to accept your offer.

“This is why all-cash offers can be so attractive to sellers, because there isn’t a loan or appraisal contingency since there is no lender,” adds Lee.

Title companies hold escrow funds

In addition to clearly understanding your contingencies, carefully track contract deadlines and ensure that the deposit is held by a reputable escrow or title company.

“Working with experienced professionals helps reduce the risk of avoidable mistakes,” Kovar points out.

Be aware that some sellers, especially home builders, may demand that they hold your earnest money instead of a neutral third party.

“But buyers should resist this request. There are instances of buyers providing earnest money to builders who, after going bankrupt or changing the terms, would not honor the original agreement and would not return the earnest money,” cautions Ailion.

Earnest money examples

Imagine that you make a good-faith deposit of $9,000 on a $300,000 home for sale. But after having the property professionally inspected, major defects are revealed. That prompts you to back out of the deal. Thankfully, you included an inspection contingency in your purchase agreement, and the deadline for having the inspection completed has not yet expired. In this scenario, you should be entitled to a full refund of your $9,000 earnest money funds.

Or, assume you make a $7,500 earnest money deposit on a $400,000 home. Your purchase contract includes a contingency that you must secure a mortgage by September 1. Unfortunately, you fail to get approved for the loan and have to back out, but it’s now September 5. In this example, the seller is allowed to keep your $7,500 deposit.

Christensen recounts a cautionary tale of a couple who moved out of state and put money down on a home they had only seen online.

“After arriving in the area, however, they determined that the neighborhood was farther from town than they had expected. Because the home meeting a ‘location preference’ was not a contingency in the purchase agreement, the couple lost their $3,000 earnest money deposit,” he says.

Earnest money FAQs

Is earnest money the same as a down payment?

No, they are separate but interrelated. Earnest money is paid early in the process to secure a purchase contract and prove to the seller that you are a serious buyer. It often equates to a small fraction of the purchase price, commonly between 1% and 3%, although this amount can be much higher and is negotiable.

Most purchase agreements/real estate contracts require that an earnest money deposit amount be made. A down payment, on the other hand, represents a larger portion of the home’s price – often at least 20% for conventional loans – required by the lender to secure the mortgage loan. At closing, the earnest money dollars are typically credited toward the down payment and/or closing costs.

Can I get my earnest money back if my mortgage application is denied?

Yes, if you have included a financing contingency in your purchase contract, and you made a good-faith effort but failed to obtain a mortgage loan as stipulated in that contract, you should be entitled to an earnest money refund.

Will my earnest money deposit affect my ability to qualify or secure a mortgage loan?

No, your good-faith deposit shouldn’t negatively impact your ability to qualify for home financing because it will ultimately be credited to your down payment and is considered a portion of your funds already set aside for the purchase.

However, your mortgage lender will want to validate that all of your funds, including the earnest money deposit, are sourced from your own savings or another acceptable financial source and that you will have sufficient funds remaining to cover the full down payment, closing costs, and financial reserves required.

Earnest money shows you're serious. A preapproval does, too

Earnest money is a symbol of good faith to the seller that you are serious about purchasing their home. Although the amount can be negotiated, many sellers expect a good-faith deposit of at least a small portion of the purchase price, the dollars of which are held in an escrow account by a neutral third party and which are credited toward your down payment or closing costs at the time of closing.

A preapproval from a lender also shows you're a serious buyer. A pre-approval shows you're a buyer who should be capable of getting a mortgage loan to finance the purchase.

Better's preapproval process can show results in as little as three minutes.

...in as little as 3 minutes – no credit impact