Earnest Money: The Deposit You Make When You Offer

What Earnest Money Is (And What It Isn't)

Earnest money is a deposit you make when you submit an offer to buy a home. It's typically 1–3% of the purchase price. The amount shows the seller that you're not just kicking tires—you're serious enough to put money on the line. It's held in a neutral escrow account while the transaction is pending, and at closing it gets credited toward your down payment and closing costs.

It's not a down payment. The down payment is the amount you put toward the purchase at closing. If your earnest money is $10,000 and your down payment is $100,000, then at closing, the $10,000 is credited against the $100,000 you owe, and you write a check for the remaining $90,000 (plus closing costs).

It's also not a fee. You're not paying anybody for the privilege of making an offer. The money is yours; it's either returned to you, credited at closing, or forfeited if you back out without a valid contingency.

How Much Should You Put Down?

In California, the standard is 1–3% of the purchase price. Here's how to think about it:

• Slow or neutral market: 1% is acceptable. If homes are sitting on the market and there's not a lot of competition, a smaller earnest deposit shows you're serious without over-committing.
• Normal competitive market: 2–2.5% is standard. This is what most sellers expect, and what most markets trade at.
• Hot/very competitive market: 3% or higher. In a market where every home has multiple offers, putting down 3% signals strength and seriousness. Some buyers go as high as 5% in ultra-competitive neighborhoods.

The practical reality: if you offer less earnest money in a competitive market, you're less likely to win the bid. If you offer more in a slow market, you're just giving yourself less leverage. There's a reason the market settles on a certain amount—it's the balance between "I'm serious" and "I'm not insane."

One caveat: if you're doing cash, you may offer 5–10% to show the seller you actually have the money. If you're financing, earnest money rarely goes above 3% because the lender wants to see you have reserves, and a huge earnest deposit depletes reserves.

Where Your Earnest Money Goes

When you make an offer, you write the earnest money check to the escrow company—not to the seller, not to the realtor, and not to the title company. This is important. The check might be delivered by the seller's agent or your agent, but it must be made out to the escrow company and go directly to them.

The escrow company deposits it into a trust account. It sits there, untouched, until one of three things happens:

1. The deal closes: Escrow credits your earnest money toward your down payment and/or closing costs. You never see it again because it's applied at closing.
2. The deal falls apart and you have a valid contingency: Escrow releases the earnest money back to you (or your lender if they have a claim on it).
3. The deal falls apart and you don't have a valid contingency: Escrow holds the money while the buyer and seller argue about who gets it. This can take months.

The key: escrow doesn't hold the money in a general account. It's in a trust account, which is subject to state regulation and must be reconciled regularly. This is why it matters that your earnest money goes to an escrow company, not to a broker or an individual. An escrow company is licensed and bonded; a broker is not required to maintain a trust account in the same way.

When You Get Your Earnest Money Back

1. Deal Closes

The most common scenario. The transaction closes, your earnest money is credited against your down payment, and you close on the home. You never see the check; it's applied automatically.

2. Inspection Contingency is Triggered

You do a home inspection, find major problems, and the seller refuses to repair them or give you a credit. You invoke your inspection contingency (assuming you have one) and walk away. Escrow returns your earnest money in full. This is the reason you include an inspection contingency in your offer.

3. Financing Contingency is Triggered

You get denied for the loan, or the lender requires repairs that the seller won't make, or your lender pulls the commitment and says the property doesn't qualify. You invoke your financing contingency and back out. Escrow returns your earnest money. (Note: this can get complicated if the lender says you were denied due to your personal finances rather than the property—but if there's a valid financing contingency in your contract, you should be protected.)

4. Appraisal Contingency is Triggered

The home appraises below the purchase price, and you can't make up the difference. If you have an appraisal contingency, you can back out, and escrow returns your earnest money.

5. Sale of Prior Home Contingency is Triggered

Your current home hasn't sold yet, and you're unable to close because you don't have the proceeds. If you have a sale of prior home contingency, you can terminate, and escrow returns your earnest money. (However: most sellers will not accept this contingency in a competitive market. It's a rare luxury.)

6. Title Contingency is Triggered

The title search reveals a problem—a lien, a judgment, a claim against the property—that the seller can't clear. You invoke your title contingency and walk away. Escrow returns your earnest money.

The pattern: as long as you have the contingency in your contract and you invoke it before the contingency deadline, your earnest money is returned. That's why contingencies matter so much.

When You Lose Your Earnest Money

You Walk Away Without a Valid Contingency

This is the scenario every buyer fears. You make an offer, the contingencies expire or are removed, and then you change your mind or something comes up. You tell the seller you're backing out. The seller says, "Your earnest money is mine," and they're right—if you don't have a valid reason (contingency) to back out, the earnest money is forfeited to the seller.

You Don't Meet a Contingency Deadline

Your inspection contingency expires on Day 10. On Day 12, you finally have the inspection done and find problems. Too late. You can't invoke the contingency because the deadline has passed. You're stuck with the home as-is, or you walk away and lose your earnest money.

This is why timelines are critical. You need to know your deadlines and hit them. Your agent should be tracking this, but don't rely on it. Mark your calendar.

The Seller Asserts a Claim

You back out for a reason that's arguably covered by a contingency, but the seller disputes it. For example, your lender denies the loan, but the seller's attorney argues that it was denied because of your personal finances, not the property. Or your inspection found problems, but the seller argues those problems were disclosed or were pre-existing. Now there's a dispute, and escrow won't release the earnest money without both parties agreeing—or a court order. This can take months or years.

Real Scenarios

Scenario 1: Appraisal Comes in Low, and You Don't Have an Appraisal Contingency

The house appraises for $50,000 less than your offer. Your lender won't lend on the higher price. You can't make up the difference. You ask to back out of the deal. The seller says, "You don't have an appraisal contingency. Your earnest money is mine." You lose the money. This is why appraisal contingencies matter, even in competitive markets.

Scenario 2: You Find a Better Home and Want to Back Out

You're under contract on Home A for $800,000 with earnest money of $20,000. Home B comes on the market for $750,000, and it's better. You try to back out of Home A to pursue Home B. Home A's seller says you don't have a valid contingency (the inspection contingency already expired, the appraisal is fine, financing is solid). Your earnest money is forfeited to Home A's seller, and now you can't afford both. You lose $20,000.

Scenario 3: Seller Misses Closing

Everything is clear. The lender is ready to fund. You're ready to close. The seller delays closing because they haven't found another home yet. You say, "I'm walking away." The seller says, "You can't—you don't have a contingency to back out because of my delay." This gets murky. Generally, if the seller breaches (by failing to close), you can back out and keep your earnest money. But you may have to litigate it if the seller disagrees. Have your attorney in your corner on this one.

Earnest Money in Competitive Markets

In a bidding war, earnest money can be a differentiator. If you're in a competitive market and you want to make your offer more attractive, you can increase your earnest money from 2% to 3% or 5%. This signals to the seller that you're serious and have skin in the game. But be careful: the more earnest money you put down, the more you have to lose if the deal falls apart. In a very hot market, 3–5% earnest money is common. In a normal market, 2% is standard. Don't put down more than you can afford to lose.

Earnest Money and Your Lender

Your lender cares about your earnest money in two ways:

1. Reserves: Your lender wants to see that you have reserves beyond your down payment and closing costs. If you put down 5% earnest money on a $500,000 home ($25,000), and you don't have other savings, the lender may be concerned that you can't absorb a problem. This can affect your approval.
2. Source of funds: Your lender will ask where your earnest money came from. If it came from a loan, the lender will count it as a debt and may reduce your loan amount. If it came from your own savings, that's good—it shows you can save and have skin in the game.

Discuss your earnest money amount with your lender before you make an offer. They'll let you know if it's a problem.

Questions to Ask Escrow When It Opens

• How much earnest money is in escrow, and where is it held? (You should get a confirmation showing the exact amount and the account it's in.)
• When can it be released? (You need to know the triggers.)
• What happens if there's a dispute? (You need to know the process and timeline.)
• Will it be credited at closing? (Yes, it should be—automatically.)