Earnest money is a good-faith deposit a buyer submits alongside an accepted offer to show the seller they are serious about following through. It typically runs 1% to 3% of the purchase price, is held in a neutral third-party account, and is later credited toward the buyer's down payment or closing costs at settlement.
How does earnest money work?
When a seller accepts your offer, the purchase agreement usually requires you to deposit earnest money within a short window, often one to three business days. The funds signal that you intend to complete the transaction rather than tie up the home and walk away, which would force the seller to relist and lose time on the market.
The money does not go to the seller directly. Instead it sits with a neutral party, commonly an escrow company or the title agent, until closing. At settlement the deposit is applied to what you owe, so it is not an extra cost on top of your purchase price. It simply moves money you were already going to pay to an earlier point in the timeline.
The typical earnest money timeline
- Offer accepted: you and the seller sign the purchase agreement, which states the deposit amount and deadline.
- Deposit delivered: you send the funds, usually by wire transfer or certified check, to the escrow holder within the agreed window.
- Held in trust: the neutral party holds the money and issues a receipt confirming the deposit.
- Contingency period: you complete inspections, appraisal, and financing while the deposit stays protected.
- Closing: the deposit is credited toward your down payment or closing costs on the closing disclosure.
How much you put down varies by market. In competitive metros, sellers may expect larger deposits to weed out less committed buyers, while in slower markets a smaller amount can be enough. The figure is negotiable and should be spelled out clearly in your contract.
Earnest money vs. a down payment
Buyers often confuse earnest money with the down payment, but they play different roles. Earnest money is a deposit made early, right after your offer is accepted, to prove commitment. It is a subset of the cash you bring to the deal, not an additional charge. The down payment is the larger sum representing your ownership stake in the property, paid at closing.
Because earnest money is credited toward what you owe at settlement, a $10,000 deposit reduces the remaining cash you need to bring on closing day by that same amount. Think of it as an installment on your total cash-to-close rather than a separate expense. The key practical difference is timing and risk: earnest money is exposed earlier and can be forfeited under certain conditions, while the down payment is finalized once you actually close.
Why earnest money matters for buyers
For first-time and diaspora buyers, earnest money is often the first significant transfer in the home-buying process, and getting it right protects your money. The deposit is refundable in many situations, but only if your contract includes the right protections. A well-drafted contingency clause lets you recover the deposit if the home inspection reveals major problems, the appraisal comes in low, or your financing falls through.
If you waive contingencies to make your offer more attractive, you also increase the chance of losing the deposit if you back out. Buyers moving money across borders should plan ahead, since international transfers can take longer to clear than domestic ones, and missing the deposit deadline can put your offer at risk.
Pros | Cons |
|---|---|
Strengthens your offer and signals serious intent to the seller | Can be forfeited if you back out for a reason not covered by a contingency |
Fully credited toward your down payment or closing costs, not an added cost | Ties up cash early, before you are certain the deal will close |
Refundable when protected by inspection, appraisal, and financing contingencies | Larger deposits may be expected in competitive markets, raising your upfront exposure |
How to protect your earnest money deposit
The single biggest risk to earnest money is wire fraud. Criminals impersonate title or escrow agents and send fake wiring instructions by email, redirecting your deposit to their own accounts. Always confirm wiring details by calling a verified phone number you looked up independently, never one from an email, before sending any funds.
- Verify wiring instructions by phone using a number you confirm separately, not one supplied in an email.
- Keep your contingencies in place so the deposit stays refundable if the deal falls apart for a covered reason.
- Meet the deposit deadline in your contract, and build in extra time if funds are coming from overseas.
- Get a written receipt from the escrow holder confirming the amount and date received.
- Read the default and cancellation clauses so you know exactly when the deposit is at risk.
Frequently asked questions
Often yes, but only when your contract includes contingencies that cover your reason for backing out. If the inspection uncovers serious issues, the appraisal is low, or your loan is denied and those contingencies are in place, you can usually recover the deposit. Walking away for an uncovered reason typically means you forfeit it.
Most deposits fall between 1% and 3% of the purchase price, though the amount is negotiable and varies by market. In competitive areas sellers may expect more, while a smaller deposit can suffice in slower markets. Your agent can advise on what is customary locally.
A neutral third party holds it, usually an escrow company, title company, or the seller's real estate brokerage trust account. The funds stay there until closing, when they are credited toward your costs, or until the deal terminates and the money is released to the appropriate party.
No. If the seller cancels without a valid contractual reason, you are generally entitled to a full refund of your deposit. Earnest money forfeiture rules apply to the buyer's default, not the seller's, though you may have additional remedies depending on your contract and state law.
You typically deliver the deposit within one to three business days after the seller accepts your offer, as specified in the purchase agreement. Sending it late can jeopardize the deal, so plan ahead, especially if the funds are coming from an international account.
Updated July 21, 2026
Disclaimer
Dara provides this glossary for general educational purposes only. It is not financial, legal, or tax advice, and availability, fees, and terms vary by country and corridor.
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