What is an earnest money deposit?

Key Insights

• An earnest money deposit shows the seller that you are committed to purchasing their property and is often held in escrow until closing.
• The amount of earnest money is dependent on the home and market conditions — talk to your REALTORⓇ to determine the best amount for you.
• Contingencies can be put in place to help ensure your earnest money deposit is either used toward the home purchase or returned to you.

When making an offer on a home, you will typically submit an earnest money deposit. This deposit shows the seller that you are deeply committed to purchasing their property. In most cases, this deposit is held in escrow until the date of closing and is then applied to your closing costs or down payment. The tips below explain why you should offer an earnest money deposit and what you should expect when you make an offer.

Why do I need to offer earnest money?

Earnest money is a way to ensure that your offer is taken seriously and protects sellers from being bound to buyers who aren’t fully committed. Earnest money protects both sides of the transaction and helps guarantee a smooth ride to closing.

How much should I offer in my earnest money deposit?

According to the National Association of REALTORS®, an earnest money deposit can range anywhere between 1 - 10% of the home’s total price. In a low inventory market, buyers sometimes increase their earnest money to strengthen their offer, but the appropriate amount depends on market conditions. Every home and homebuyer is different, so it’s important to work with your REALTOR® for insights about how much earnest money you should offer.

When and where should I deposit my earnest money?

Earnest money is an indication of your commitment to purchasing the home, and the purchase agreement typically requires it to be deposited within a specific timeframe. It is generally a good practice to complete the deposit as soon as possible after your offer is accepted and the purchase agreement is signed.

The earnest money deposit will typically be held in an escrow account by the listing broker until closing. An escrow account is a third-party account used to securely hold funds and documents until the transaction closes.

Will I get my earnest money deposit back?

If the sale is successful, the earnest money deposit is generally applied to the closing costs of the home or the down payment. However, earnest money deposits—like all deposits—do carry some risk if you don’t meet the original terms of the offer.

When you submit your offer, your REALTOR will advise you of the necessary contingencies to include in the terms. Then, if the home purchase cannot proceed due to a contingency not being met, your earnest money deposit is generally returned, in accordance with the terms of the purchase agreement.

Common contingencies include:

• Contingent on appraisal: Protects the buyer if the home’s appraised value comes in below the purchase offer.
• Contingent on inspection: Protects the buyer if an impartial inspector reveals unsatisfactory housing conditions.
• Contingent on financing: Protects the buyer if they are unable to find sufficient financing to purchase the home.
• Contingent on home sale: Protects the buyer if they are unable to sell their home before the closing date.

If the transaction is unsuccessful for reasons not covered by a contingency, such as the buyer deciding to buy a different home, the seller is typically entitled to keep the earnest money deposit.

What else do I need to know about making an offer using earnest money?

An earnest money deposit may seem a bit tricky, but you’re never alone in the home buying process. Your REALTOR will offer insights and walk you through every step, from finding the right home to securing the right loan. Call, email or chat to get in touch with a home buying expert in your area today.