Earnest Money
Earnest money is a deposit made by a buyer when submitting a purchase offer on a property, demonstrating serious intent to complete the transaction. The deposit is held in escrow and typically applied toward the down payment or closing costs at settlement.
What This Means
Purpose and Typical Amounts
Earnest money signals to the seller that the buyer's offer is made in good faith. The deposit is submitted with the purchase agreement and held by a neutral third party, usually a title company, escrow agent, or real estate brokerage, until closing. Typical earnest money deposits range from 1% to 3% of the purchase price , though amounts vary by market. In competitive markets, buyers may offer larger deposits to strengthen their offer. There is no legal minimum or maximum.
Escrow and Application at Closing
The funds are deposited into an escrow account and are not released to the seller until closing. At settlement, the earnest money is credited toward the buyer's closing costs or down payment. The Closing Disclosure itemizes how the deposit is applied. If the transaction does not close, the disposition of the earnest money depends on the terms of the purchase contract and which contingencies, if any, were exercised.
Contingencies and Refundability
Most purchase agreements include contingencies that allow the buyer to recover the earnest money deposit if specific conditions are not met. Common contingencies include:
- Financing contingency: buyer cannot obtain mortgage approval
- Appraisal contingency: property appraises below the agreed price
- Inspection contingency: property inspection reveals material defects
- Title contingency: title search reveals unresolvable issues
If a buyer withdraws outside the terms of these contingencies, the seller may be entitled to retain the earnest money as liquidated damages per the contract terms. The specific rules governing earnest money disputes vary by state.