Earnest Money
Definition and meaning of Earnest Money in real estate.
Earnest money is a good-faith deposit that a home buyer submits with their purchase offer to show the seller they are serious about buying the property. This money is held in a neutral escrow account until the sale is finalized or canceled.
In more detail
Sellers take their properties off the market when they accept an offer, risking time and other opportunities. The earnest money deposit protects the seller by compensating them if the buyer backs out of the contract without a legally valid reason. If the transaction proceeds successfully, the deposit is applied toward the buyer's down payment or closing costs.
If the deal falls through due to a failed contract contingency, such as a low appraisal or a bad inspection, the buyer is typically refunded the deposit.
Key facts
| Category | Buying & Selling |
|---|---|
| Also known as | Good faith deposit |
| Typical amount | One percent to three percent of the home's purchase price |
| Held by | A neutral third party, such as a title company or escrow agent |
A buyer includes a check for five thousand dollars as earnest money when submitting an offer on a townhouse, which is deposited into an escrow account after the seller accepts.
Frequently asked questions
Is earnest money refundable if the sale falls through?
Yes, if the buyer withdraws due to a contingency specified in the contract, such as a failed inspection or financing issue, the deposit is refunded. If the buyer defaults without a contingency, the seller keeps the money.
When do you pay earnest money?
Earnest money is typically paid within one to three days after the seller accepts the buyer's purchase offer.