Earnest money is a good-faith deposit the buyer makes after the seller accepts the offer. It shows the buyer is serious. It's usually held by a title company or brokerage, and at closing it goes toward the buyer's down payment or closing costs. If the buyer backs out for a reason the contract allows, by the deadline, they usually get it back. If they back out for a reason it doesn't, or miss a deadline, they can lose it. Here's how I explain it.
The short answer
Earnest money is the buyer's skin in the game. It's not an extra cost. It's part of what they'd pay at closing anyway. It's protected by the contract's deadlines and conditions, so the buyer has to know those dates.
Step by step
- Set the amount in the offer. Often 1% to 2% of the price in many markets. Local custom varies. More can make the offer stronger, but more is at risk.
- Know who holds it. Title company, brokerage or other holder, as the contract states.
- Deliver it on time. The contract sets an earnest money deadline. Late delivery can be a breach.
- Protect against wire fraud. Confirm wiring instructions by phone using a number you found yourself. Never trust emailed instructions alone.
- Calendar every deadline. Inspection, appraisal, loan, title, HOA documents. These are when the buyer can object or terminate.
- Terminate the right way. If the buyer needs out, use the approved form, before the deadline, for a reason the contract allows.
- Release it properly. Releases usually need a signed mutual release or follow the contract's dispute process. Agents don't decide who gets it.
- At closing, it's credited to the buyer.
A worked example (illustration only)
A buyer offers $450,000 with 1.5% earnest money ($6,750).
| Scenario | Usually |
|---|---|
| Inspection finds a bad roof; buyer terminates on the approved form before the inspection deadline | Earnest money returned |
| Loan denied; buyer terminates before the loan deadline per contract | Earnest money returned |
| Buyer changes their mind after all deadlines pass | Seller may keep it |
| Buyer misses the closing date without an agreed extension | Seller may claim it |
| Deal closes | $6,750 credited toward the buyer's costs |
Illustration only. The contract controls. Disputes follow the contract's process. This isn't legal advice.
How to explain it to your client
"Earnest money is your good-faith deposit. It shows the seller you're serious. It's not extra money. It goes toward your down payment at closing. It's held by the title company, not the seller. As long as we follow the contract and use our deadlines, you're protected. If the inspection or the loan doesn't work out and we cancel on time, you get it back. The risk is if you just change your mind late, or we miss a deadline. That's why I'll keep every date on the calendar for you."
Watch-outs
- Wire fraud is real. Warn every buyer in writing. Verify by phone.
- Deadlines protect the money. Calendar them on day one. Remind the buyer.
- Agents don't release funds. The holder follows the contract and signed releases.
- "Non-refundable" terms. Some offers make earnest money non-refundable after a point. Explain the risk and check with your managing broker.
- HUD homes are different. HUD sets the amount and rules. See HUD earnest money.
- No legal advice. In a dispute, send the client to an attorney.
This is training for real estate agents. It isn't legal advice. Use your state's approved forms and check with your managing broker.
Questions
How much earnest money is normal?
It depends on the market. 1% to 2% is common in many areas. Ask your managing broker what's typical locally.
Who holds earnest money?
Usually a title company or the brokerage, as the contract says.
Can the seller just keep it?
Only as the contract allows. Disputes follow the contract's process.
When does the buyer get it back?
When they terminate properly under a contract right, by the deadline.
Does earnest money count toward the down payment?
Yes. It's credited at closing.
Brian Lee Burke is the founder of PadLeaders, a Colorado real estate broker licensed since 2003, team leader of The Kenna Group at Keller Williams DTC (formerly Kenna Real Estate Group) and the author of Mastering Real Estate and The Real Estate Playbook. More about Brian.