Real Estate
Definition
A good-faith deposit made by a buyer when submitting a purchase offer, demonstrating serious intent to complete the transaction.
Earnest money — sometimes called a good-faith deposit — is a sum of money a buyer submits along with a real estate purchase offer to signal genuine intent to complete the purchase. It typically ranges from 1% to 3% of the purchase price in most markets, though competitive markets may see deposits of 5% or more. The funds are held in escrow by a neutral third party — usually a title company, escrow company, or the seller's real estate brokerage — until closing.
At closing, earnest money is credited toward the buyer's down payment or closing costs, so it is not an additional expense but rather an early payment of funds already owed. The real significance of earnest money lies in what happens if the deal falls through. If the buyer backs out for a reason covered by a contingency — financing, inspection, appraisal — the earnest money is typically refunded in full. If the buyer walks away without a valid contingency, the seller can usually keep the deposit as compensation for the time lost and the property taken off the market.
Contingencies are the critical safeguards tied to earnest money. Common contingencies include a financing contingency (protecting the buyer if they cannot secure a mortgage), an inspection contingency (allowing the buyer to back out or renegotiate based on inspection findings), and an appraisal contingency (protecting the buyer if the property appraises below the purchase price). Each contingency has a deadline; missing a deadline can result in automatic waiver and put the earnest money at risk.
In competitive markets, buyers sometimes waive contingencies or offer larger earnest money deposits to make their offers more attractive. These tactics increase risk significantly and should only be considered with thorough professional guidance.
Earnest money represents real financial exposure for buyers. A misstep — missing a contingency deadline, misunderstanding the terms of the purchase agreement, or waiving a contingency carelessly in a competitive market — can result in losing thousands of dollars. Understanding exactly when your earnest money is protected and when it is at risk is essential before signing any purchase agreement.
A knowledgeable real estate professional or real estate attorney will review your purchase agreement, help you structure contingencies that protect your deposit while keeping your offer competitive, and track all deadlines throughout the escrow period. These are not details to navigate alone when thousands of dollars are on the line.