Understanding Earnest Money and Why It Matters

When buying a home, you’ll likely hear the term earnest money. Often called a “good faith deposit,” it’s a small but important part of the homebuying process that protects both buyers and sellers. Knowing how earnest money works can help you navigate your purchase with confidence.

What Is Earnest Money?

Earnest money is a deposit the buyer puts down after the seller accepts their offer. It shows the buyer is serious about moving forward with the purchase. Typically, the deposit is held in an escrow account until closing.

How Much Is It?

The amount varies by market, but it’s usually 1–3% of the home’s purchase price. In hot markets, buyers sometimes offer more to show commitment.

Why It Matters for Buyers

• Demonstrates Seriousness: Sellers are more likely to take your offer seriously if earnest money is included.

• Applied to Closing Costs: At closing, earnest money is applied toward the down payment or other costs, so it’s not an “extra” expense.

• Risk of Losing It: If a buyer backs out without a valid reason (outside the contract’s contingencies), the seller may keep the deposit.

Why It Matters for Sellers

• Security: It reduces the risk of buyers walking away casually.

• Compensation for Lost Time: If a buyer backs out improperly, earnest money can help offset the seller’s lost time on the market.

The Bottom Line

Earnest money is a key part of building trust in a real estate transaction. For buyers, it shows commitment; for sellers, it provides security. Understanding how it works ensures smoother negotiations and a stronger foundation for closing the deal.