Earnest Money

When a buyer and seller enter into a purchase agreement, the seller will take the home off the market while the transaction moves through the process to closing. If the deal falls through, the seller has to relist the home and start over, which could result in a significant financial loss. As you near the process of making an offer on a home, your real estate agent will want to discuss Earnest Money — a form of security deposit also known as a “good faith” payment.

What Is Earnest Money?

Earnest money is a deposit made by the buyer to demonstrate serious intent to purchase the home. It shows the seller that you’re acting in good faith and committed to the transaction, and provides them with some compensation in case you back out of the deal without a valid, contractual reason.

How Much Should You Deposit?

The amount of earnest money varies by market. In California, earnest money deposits are typically 1% to 3% of the purchase price, though in highly competitive markets buyers sometimes offer more to make their offers stand out. Your agent will advise on what is customary and competitive in your specific situation.

Where Does It Go?

Earnest money is held in an escrow account by a neutral third party — usually a title or escrow company — until the transaction closes. At closing, it is applied toward your down payment or closing costs.

When Can You Get It Back?

Your ability to recover your earnest money depends on the contingencies in your purchase agreement. Standard contingencies include the home inspection contingency, financing contingency, and appraisal contingency. If you need to back out of the deal for a reason covered by one of these contingencies and you do so within the specified timeframe, you should receive your earnest money back in full.

What If You Back Out Without a Contingency?

If you choose to walk away from a deal after your contingencies have been removed or expired, the seller may be entitled to keep your earnest money. This is why it’s critical to fully understand the contingency periods in your contract and to make deliberate decisions before waiving or removing protections.