What is earnest money?

When you’re ready to buy a home, your offer will need to include more than just the purchase price.

Earnest money is a key piece of your offer. It’s a “good faith” deposit that you use to show the seller that you’re serious about buying the home. If you back out of the deal, you may lose the earnest money — and the seller gets to keep it.

Earnest money is negotiated between buyer and seller as part of the sale, so terms can vary depending on the price of the home, the type of home and other variables. We’ll go over how earnest money generally works and how it’s commonly handled.

• How earnest money works
• Why earnest money is required
• How much earnest money will I pay?
• Is earnest money refundable?
• Is earnest money the same as a due diligence fee?
• What if there’s a dispute over the earnest money?

How earnest money works

When you make an offer on a house, earnest money is often part of the deal. It’s not required by law, but sellers can — and typically do — demand earnest money to consider an offer. Earnest money is a deposit that shows you’re serious about buying the home.

You’ll generally write a personal check or perhaps use a cashier’s check or money order to provide the earnest money. You might consider writing a check and giving it to your real estate agent to present with along with your offer (the check will be returned to you if your offer isn’t accepted). Or you may choose to write the check once your offer is accepted.

You may also be able to pay the earnest money deposit using a certified check, wire transfer or cash.

If your offer is accepted, your purchase contract — the agreement you sign that outlines terms for buying the home — will dictate what happens to the earnest money. But typically, earnest money will be held by the real estate attorneys or agents in a trust or escrow account. The earnest money may apply toward the purchase at closing.

Why earnest money is required

Earnest money isn’t required by law as part of a home purchase, but sellers may generally prefer offers that include it. That’s because it shows the seller that you’re serious about following through on the deal. In theory, without an earnest money deposit a buyer could make offers on multiple homes at once, taking them off the market and leaving sellers in the lurch.

How much earnest money will I pay?

The earnest money you pay is negotiable as part of the offer you make on the home. It’s often a small percentage of the purchase price of the home, though the formula tends to vary based on local real estate market conditions.

A deposit of 1% to 3% is common — for a $300,000 home, that would mean the earnest money could be around $3,000 to $9,000. But in a hot housing market, the amount of earnest money you may need to offer to be competitive might be much higher.

Is earnest money refundable?

It depends on the situation.

If the sale closes as expected, the earnest money may be applied toward the down payment or closing costs. But if the home sale falls through, what happens to the earnest money is dictated by the purchase contract you signed.

Generally, you can get your earnest money back if you cancel the contract during the due diligence period, which is the limited time you have between the time your offer is accepted on the home until closing day. You should also get your earnest money back if the home seller can’t fulfill all their obligations.

But if you back out of the sale after the due diligence period or can’t close on the sale because your loan falls through, you usually forfeit the earnest money to the seller.

Is earnest money the same as a due diligence fee?

No, earnest money isn’t the same as a due diligence fee.

While you negotiate both as part of your offer to buy the home, the due diligence fee is money paid directly to the home seller as compensation for holding the home during the time you conduct inspections, get your financing lined up and otherwise make sure the home is as advertised.

What if there’s a dispute over the earnest money?

As you craft your offer to buy a home, discuss with your real estate agent what terms and conditions you’d like to have related to your earnest money.

It’s important to be confident in the terms you agree upon for earnest money. If your offer to buy a home falls through, getting your earnest money back might be tricky, depending on the situation. For example, if there’s a dispute over what should happen to the earnest money, the broker or attorney holding the earnest money may be required to keep it until the problem is resolved.

Your purchase contract should clearly specify who’s entitled to the earnest money. But if you and the seller can’t come to an agreement, a court may have to decide the matter for you.