What Is Earnest Money & How Does It Work?
When you’re buying a home, you’ll notice a few key terms pop up early in the process, and “earnest money” is one of them. It might sound complicated, but it’s actually a simple (and important) part of making your offer stand out.
Here’s everything you need to know.
What Is Earnest Money?
Earnest money is a good-faith deposit that shows the seller you’re serious about purchasing their home. Think of it as putting skin in the game. By offering this deposit, you demonstrate commitment - which can make your offer stronger in a competitive market.
Typically, earnest money ranges from 1–3% of the purchase price, depending on your location and the market’s competitiveness.
Where Does Earnest Money Go?
Good news: you don’t lose it (as long as everything goes smoothly).
After your offer is accepted, the deposit is held safely in an escrow account- usually with the closing attorney, title company, or brokerage. Then, when you close on the home, your earnest money is applied toward your:
Down payment
Closing costs
Or other agreed-upon buyer expenses
It’s essentially an early contribution toward your final costs.
How Does Earnest Money Protect You?
Earnest money isn’t just for the seller… it actually protects you, too.
Your purchase contract includes contingencies (like financing and inspection). These give you the right to walk away with your earnest money refunded if something legitimate comes up.
For example:
The inspection reveals major issues ⟶ refund
The appraisal comes in too low ⟶ refund
Your financing falls through for a covered reason ⟶ refund
\These built-in protections help you move forward with confidence.
When Can Earnest Money Be Forfeited?
There are situations where a buyer can lose their earnest money. This typically happens when a buyer backs out of the contract for a reason not protected by a contingency.
Examples include:
Getting cold feet or changing your mind
Missing contract deadlines
Deciding to pursue another home mid-contract
This is why working with a proactive agent (hi 👋🏼) is so important - we keep you on track, informed, and protected every step of the way.
How Much Should You Put Down?
Your agent will help guide this decision based on:
Local market conditions
Seller expectations
How strong you want your offer to appear
In multiple-offer situations, a larger earnest money deposit can make your offer more competitive, because it signals confidence and financial readiness.
The Bottom Line
Earnest money is a key part of the homebuying process that shows sellers you’re serious, strengthens your offer, and, when handled correctly, ultimately goes toward your purchase. With the right guidance, it’s a smart, secure step that helps move you closer to homeownership.
If you’re planning to buy soon or have questions about how earnest money works in your specific situation, our team at ERG is here to help you navigate every step.