Earnest Money

Earnest money (also called a good faith deposit or initial deposit) is money a buyer submits with their purchase offer to demonstrate serious intent to purchase. It shows the seller you are committed and willing to risk real funds. Typical amounts vary by market: (1) Standard markets: 1–2% of the purchase price (e.g., $5,000–$10,000 on a $500,000 home); (2) Competitive/hot markets: 3–5% or more — higher earnest money can make an offer more competitive when multiple bids exist; (3) New construction: builders often require a fixed amount ($1,000–$10,000) plus additional deposits at milestones. Earnest money is typically due within 1–3 business days of an accepted offer and is held in an escrow account by the title company, real estate broker, or attorney. At closing, it is applied toward your down payment or closing costs. The CFPB closing process guide explains how deposits flow at closing.

Earnest money can be forfeited (kept by the seller) if the buyer backs out of the contract without a valid contingency that allows cancellation. Common situations where you forfeit: (1) Buyer changes mind — no valid contingency exit = forfeit; (2) Missed contingency deadline — if you fail to request an extension and the contingency period expires, you may lose protection; (3) Waived contingency — in competitive markets, buyers sometimes waive inspection or financing contingencies to win; if you can't close without those protections, you risk the deposit; (4) Contract breach — failing to appear at closing, failing to secure financing you contractually committed to. Valid contingencies that protect your deposit include: financing contingency, home inspection contingency, appraisal contingency, and home sale contingency. Always ensure these are in your contract before removing them. See CFPB — Making an offer for contingency basics.

Earnest money and a down payment are related but distinct: (1) Earnest money: paid immediately when your offer is accepted; held in a third-party escrow account; demonstrates intent; typically 1–3% of purchase price; applied toward the down payment or closing costs at closing; (2) Down payment: the total equity contribution at closing; could be 3–20%+ of the purchase price; wired to the title company at closing. The earnest money is almost always part of the down payment — it's just paid earlier. Example: 10% down payment on a $400,000 home = $40,000 total down payment. If you paid $8,000 earnest money, you wire $32,000 more at closing ($40,000 − $8,000). Your lender's Closing Disclosure will show the earnest money credit as a deduction from the cash due at closing. See how to read the Closing Disclosure to find the earnest money credit on Page 3.

The outcome depends on why the deal fell through: (1) Seller backs out: the buyer typically receives their earnest money back, plus potentially additional damages; (2) Buyer backs out with a valid contingency: earnest money is returned to the buyer; (3) Buyer backs out without a valid contingency: earnest money is forfeited to the seller; (4) Dispute: if seller and buyer disagree, the escrow holder typically cannot release the funds without a signed release from both parties or a court order — funds can sit in escrow for months during a dispute. If the transaction fails due to a financing contingency (loan is denied), the buyer is entitled to the earnest money back — assuming the financing contingency was not waived and the buyer applied for financing in good faith. Document all contingency removals and deadlines carefully with your agent. See the NAR buyer survey for context on deposit disputes.

Earnest money is held in a neutral third-party escrow account — it does not go directly to the seller until closing. The escrow holder is typically: (1) the title company or escrow company handling the transaction; (2) the listing agent's brokerage (in some states); (3) a real estate attorney (in attorney-close states like NY, MA, SC). The escrow holder is a fiduciary — they cannot release the funds without instructions from both parties or a court order. Key protections: (1) funds should be deposited within 1–3 business days; get written confirmation of deposit; (2) never wire earnest money directly to the seller or listing agent's personal account — this is a common wire fraud vector; (3) verify the escrow company's account details via a phone call to a verified number (not from email) before wiring. Mortgage wire fraud involving fake earnest money instructions is a significant risk — see mortgage fraud prevention 2027 for wire safety practices.

In Canada, the equivalent of earnest money is called a deposit, and it functions similarly — it's a sum paid when an offer is accepted to demonstrate buyer intent and bind the agreement. Key differences from the US: (1) Canadian deposits are typically larger in major urban markets (1–5% of purchase price is common in Toronto and Vancouver, with some competitive situations requiring higher); (2) The deposit is held in trust by the listing brokerage (not a title company) until closing; (3) If the buyer backs out without a valid condition (inspection, financing), the deposit is typically forfeited to the seller; (4) In Ontario, the deposit is due within 24 hours of acceptance in many offers; (5) If a deal falls through due to a condition (financing condition not met), the deposit is returned. The rules around deposit forfeiture vary by province and are governed by provincial real estate legislation. See the RECO (Real Estate Council of Ontario) buying guide for Ontario deposit rules.