Buying · Making An Offer
How earnest money actually works, and what determines whether you get it back
Earnest money is the deposit a buyer puts down with an accepted offer to signal commitment. It's typically 1–3% of the purchase price, held by a neutral third party, and the contract determines whether the buyer gets it back if the deal doesn't close.
When a buyer's offer is accepted, they typically deposit earnest money (a few percent of the purchase price) into an escrow account held by a neutral party.1 The deposit signals seriousness to the seller, and gives the seller something to keep if the buyer walks away outside the contract's contingencies. If the deal closes, the earnest money is applied toward the down payment or closing costs and is not an additional cost.
How much, and where it goes
Earnest money is typically 1–3% of the purchase price, with the actual amount driven by market conditions and contract negotiation. In hot markets, sellers often expect higher deposits to filter out non-serious offers; in cooler markets, lower deposits are common. On a $400,000 home, the deposit is typically $4,000–$12,000.
The deposit goes into an escrow account held by a neutral third party. Depending on the state and the contract, that party is the title company, a real estate attorney's trust account, or the listing broker's trust account. The funds sit there until closing or until the contract terminates.
The deposit is typically due within 1–3 business days of contract acceptance, by wire or certified check. Personal checks aren't always accepted, especially in high-volume markets where time is short. Wire-fraud schemes targeting earnest money have become common enough that the receiving party should always be confirmed by a known phone number, never by responding to wire instructions received in email.
What determines whether the buyer gets it back
This is where the contract does the heavy lifting. The standard purchase contract includes several contingencies (financing, inspection, appraisal, sometimes others) each of which gives the buyer a contractual right to back out and recover the deposit if a specific condition isn't met. The deposit's fate depends on which contingencies are in place, which have been satisfied, and what triggered the termination.
The clean cases are roughly these. If the buyer terminates within the inspection contingency window (citing inspection findings), the deposit returns. If the appraisal comes in low and the buyer terminates under the appraisal contingency, the deposit returns. If the buyer's financing falls through and the financing contingency is in place, the deposit returns. If the seller breaches the contract (refuses to close, can't deliver clear title), the deposit returns and the buyer may have additional remedies.
The contested cases are messier. If the buyer waived a contingency and the issue covered by that contingency comes up, the deposit may be at risk. If the buyer terminates outside any contingency window (buyer's remorse, change of mind, inability to close for personal reasons) the deposit may go to the seller as liquidated damages. If the inspection turns up issues but the inspection contingency window has already passed, the buyer may have to choose between proceeding and losing the deposit.
The earnest-money disposition is one of the more contentious areas in real estate. Sellers who feel a buyer walked away unreasonably want the deposit; buyers who feel they had legitimate cause want it returned. The contract language is what governs, and the language varies by state and by the specific form used.2
What goes wrong
A few common problems worth flagging. The first is contingency timing, most contingencies have specific windows (often 7–14 days for inspection, longer for financing and appraisal). Once a window closes, the buyer can no longer terminate under that contingency, and walking away after that point puts the deposit at risk. Calendar discipline during the under-contract period matters more than most buyers realize.
The second is informal communication that gets read as a contractual position. Buyers sometimes tell the seller's side they're "not sure" or "having second thoughts" before formally exercising a contingency, which can later be used to argue the buyer was acting outside the contract. The right path, when issues come up, is to document concerns in writing and exercise the relevant contingency formally if needed.
The third is the disputed-deposit deadlock. When both sides claim the earnest money, the escrow holder typically can't release it without a written agreement or a court order. The funds can sit for weeks or months. Resolving these disputes is sometimes a matter of who gives up first, since the litigation cost of pursuing a $5,000–$15,000 deposit is often higher than the deposit itself.
A useful frame
The deposit is the buyer's signal that they're serious, and it's the seller's protection against buyers who tie up their property and then walk away. The contract decides whether it returns or doesn't. The contingencies in the contract are the buyer's protection. Understanding which contingencies are in place, which windows are still open, and what the contract says about disposition is the difference between an earnest-money question that resolves cleanly and one that drags on for months.