Q&A / Buying a home
What is earnest money?
Short answer
Earnest money is a deposit you put down after your offer is accepted. It shows the seller you’re serious. If the sale closes, it counts toward your purchase. You can lose it if you back out for a reason your contract doesn’t allow.
Where does the money go?
Not to the seller. A neutral party holds it, usually a title company or a brokerage’s escrow account, until closing. Your contract spells out who holds it and how quickly you have to deliver it.
How much earnest money do I need?
There’s no single number. It depends on the price of the home and how much competition there is. A bigger deposit can make your offer look stronger, because it shows the seller you have more on the line.
Your agent should tell you what’s normal for your price range and area right now, so you’re not putting down too little to compete or more than you need to.
What happens to it at closing?
It’s credited back to you. It counts toward your down payment or closing costs. It isn’t an extra fee on top of everything else. It’s money you were going to spend anyway, just paid early.
When do I get it back if I back out?
Usually when you back out using one of the conditions in your contract, called contingencies, and you do it before the deadline. For example:
- The inspection turns up a serious problem, and you cancel during your inspection period.
- Your loan falls through, and you’re protected by a financing contingency.
- The house appraises for less than the price, and you have an appraisal contingency.
If the deal falls apart for one of those reasons, you generally get your deposit back.
When can I lose it?
Buyers usually lose earnest money in one of three ways:
- They change their mind and walk away without a reason the contract allows.
- They had a valid reason but missed the deadline to use it.
- They gave up a contingency to win the house, then needed it later.
What I tell my clients
Deadlines are where buyers get burned. A contingency only protects you if you use it on time. The day you sign, put every date from your contract on your calendar.
Words you’ll hear
- Escrow
- Money held by a neutral party until both sides do what the contract says.
- Contingency
- A condition in your contract that lets you back out if something specific goes wrong.
- Default
- Not doing what you agreed to in the contract, like missing a deadline or walking away without a valid reason.
Have a question that isn’t here?
Send it to me. I’ll give you a straight answer, and if other people are wondering the same thing, it might become the next page in this Q&A.
This is general information to help you understand the process. It isn’t legal or financial advice. Your contract, your lender and your agent have the final word on your situation.