Module 8 · Lesson 4
What Is Earnest Money?
Explains what earnest money is, how much is typical, and what happens to it during a home purchase.
6 min read
What you'll learn
- What earnest money is and why it is used
- How much earnest money buyers typically put down
- Where earnest money is held
- When a buyer might lose their earnest money
Earnest money is a deposit a buyer puts down shortly after a seller accepts their offer, as a sign of good faith that they intend to follow through with the purchase. It is sometimes called a good faith deposit.
Why Sellers Ask for It
Once a seller accepts an offer, they typically take the home off the market and turn down other potential buyers while the transaction moves forward. Earnest money gives the seller some assurance that the buyer is committed, and it provides a measure of compensation to the seller if the buyer backs out without a valid reason allowed by the contract.
How Much Is Typical
There is no single required amount. Earnest money is often a small percentage of the purchase price, and the customary amount can vary significantly by local market and by how competitive the offer needs to be. Buyers should ask their agent what is typical in their area rather than assume a fixed rule.
Where the Money Goes
Earnest money is not paid directly to the seller. It is usually deposited with a neutral third party, such as a title company, escrow company, or real estate brokerage, and held in a dedicated account until closing. This protects both parties, since neither side can access the funds unilaterally.
What Happens at Closing
If the sale closes as planned, the earnest money is credited toward the amount the buyer owes, reducing the cash they need to bring at closing. It is not an extra fee on top of the purchase price; it is simply paid earlier and counted later.
When a Buyer Can Lose It
If a buyer backs out of the purchase for a reason not protected by a contingency in the contract, such as simply changing their mind with no qualifying reason, they may forfeit their earnest money to the seller. This is why contingencies, such as those covering financing, inspection, and appraisal, are important protections built into most offers.
Earnest money is a routine and expected part of most home purchase contracts. Understanding how much is typical locally, where it is held, and which contingencies protect it helps buyers approach this step with confidence rather than confusion.
Key takeaways
- Earnest money is a deposit that shows a buyer is serious about a purchase offer.
- It is usually held by a neutral third party, not the seller directly.
- The amount varies by market and is typically a small percentage of the purchase price.
- Earnest money is normally applied toward closing costs or the down payment if the sale closes.
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Educational content only — not financial, legal, or tax advice. Verify details with a licensed professional for your situation.