What Is Earnest Money?
Earnest money is a good faith deposit that a buyer submits shortly after their offer on a home is accepted. It is typically held in an escrow account by a third party, such as a title company or real estate brokerage, until the transaction is complete. This deposit shows the seller that the buyer is serious and financially prepared to proceed with the purchase.
The amount of earnest money can vary depending on the market and the price of the home, but it generally ranges from one percent to three percent of the purchase price. In more competitive markets, a higher deposit may help strengthen a buyer’s offer.
Why Does Earnest Money Matter?
Earnest money is important because it helps protect both parties in a real estate transaction. For the seller, it offers reassurance that the buyer is acting in good faith. Accepting an offer means taking the property off the market, and the earnest money deposit helps compensate the seller if the buyer backs out without a valid reason.
For the buyer, it shows commitment and increases the likelihood that the seller will accept their offer, especially when multiple offers are on the table. Once the transaction is completed, the earnest money is usually applied toward the buyer’s closing costs or down payment.
What Happens If the Deal Falls Through?
Whether or not the buyer gets their earnest money back depends on the circumstances and the terms outlined in the purchase agreement. If the sale is canceled for reasons that are covered by contingencies, such as financing issues, an unsatisfactory home inspection, or problems uncovered during the appraisal, the earnest money is typically refunded to the buyer.
However, if the buyer simply changes their mind or fails to meet agreed-upon deadlines, the seller may be entitled to keep the earnest money as compensation for the time and opportunity lost.
How Buyers Can Protect Their Earnest Money
To protect their deposit, buyers should work closely with a real estate professional to ensure all contract terms, timelines, and contingencies are clearly outlined and understood. It is also essential to stay on top of deadlines and communicate proactively throughout the process.
A well-written contract, combined with guidance from a trusted real estate agent, helps avoid misunderstandings and keeps both parties on track to a successful closing.
Earnest money may only be a small percentage of the total cost of a home, but it carries significant weight in a real estate transaction. Understanding how it works, when it is refundable, and why it matters can give buyers peace of mind and a stronger position in a competitive market.