Earnest money explained: how much, who holds it, and how you lose it

Earnest money is the deposit that tells a seller your offer is serious. It is your money until closing — but only if the contract’s contingencies are written and used correctly.

How much

Customs vary by market: 1% to 2% of the price is common nationally, 3% or more in competitive markets or on new construction, and a flat $500 to $1,000 in some lower-priced areas. A larger deposit signals strength in a bidding war; it also raises what you could lose.

Who holds it

Never the seller. The deposit goes to a neutral third party — the title or escrow company, the listing brokerage’s trust account, or a closing attorney — within a few days of the accepted offer, by wire or cashier’s check. At closing it is credited toward your down payment and closing costs. Confirm wire instructions by phone with the escrow holder before sending; earnest money wires are a favorite target of fraud.

When you get it back

You get the deposit back if you cancel under a contingency within its deadline. The standard ones:

• Inspection contingency: cancel for any reason (or negotiate repairs) within the inspection period, typically 7 to 14 days.
• Financing contingency: cancel if your loan is denied by the deadline (often 21 to 30 days). A weak or late denial letter can put the deposit in dispute.
• Appraisal contingency: cancel or renegotiate if the home appraises below the price.
• Title and HOA document review: cancel if the title has defects or the association documents reveal problems.
• Sale of your current home: rarely accepted in competitive markets.

When you lose it

You forfeit the deposit if you back out after your contingencies have expired or been waived, or if you simply miss a deadline. In most contracts the seller’s remedy is limited to keeping the deposit (“liquidated damages”); in some states the seller may also sue for actual damages. Waiving contingencies to win a bidding war means your earnest money is at risk from the day of acceptance.

Disputes

Escrow holders release the deposit only on written instructions signed by both parties or a court order. If the seller refuses to sign a release you are entitled to, the money sits in escrow until mediation, arbitration or small claims court resolves it. Keep every notice you send in writing and dated.

Frequently asked questions

Is earnest money the same as a down payment?

No. Earnest money is a deposit toward the purchase that is later applied to your down payment and costs. The down payment is the total cash you bring at closing beyond the loan.

Can I pay earnest money with a credit card?

Almost never; escrow holders require verified funds (wire or cashier’s check). Funds must also be documented for the lender, so they should come from an account on your loan file.

What happens to earnest money if the seller backs out?

You get it back in full, and depending on the contract and state you may have additional remedies, including suing for specific performance.

Related: Appraisal gap: what happens when the home appraises below your offer · Twelve first-time home buyer mistakes — and the cheap fix for each · Closing costs explained: what is negotiable, what is not · Pre-approval vs pre-qualification: what sellers actually respect. Hub: First-time buyer.