Earnest Money in Real Estate: Refunds, Returns and Regulations

Earnest money is an important part of a real estate transaction. Known as a “good faith deposit,” it’s the money a buyer pays to a seller to demonstrate a commitment to purchasing the seller’s home. Earnest money is increasingly being leveraged in real estate negotiations to make a home buyer’s offer stand out against competing offers.

But in certain situations, a buyer’s earnest money—typically thousands of dollars—could be at risk. Real estate agents play an important role in keeping their client’s deposits safe. “Knowing how earnest money works is essential knowledge for both the buyer’s and seller’s agents,” says Bill Gassett, a real estate pro with RE/MAX Executive Realty in Hopkinton, Mass. “Earnest money is like the glue in a successful real estate transaction.”

This guide details how earnest money is often handled in real estate transactions and how real estate agents can leverage it and avoid potential disputes.

What Is Earnest Money and Why Is It Important?

Earnest money is a deposit made by the home buyer to the seller, showing a commitment to purchase the property. This deposit is not made until the seller accepts the buyer’s offer on the property. The earnest money is often held in a third-party escrow account until the transaction closes. Although commonly used in real estate, earnest money is optional.  But some sellers may not even entertain an offer on the home if the buyer doesn’t include earnest money, Gassett says.

How much earnest money should a buyer offer? The buyer’s real estate agent likely will recommend considering several factors to arrive at the number:

• The competitiveness of the market (higher deposits often are needed in markets with higher demand)
• The seller’s preferences
• What’s customary practice in the area
• Whether earnest money could be used to make an offer more attractive

Earnest money deposits can range from 1% to 10% of the home’s purchase price. For example, a 1% deposit on a $400,000 home would amount to $4,000. Nick Wemyss, SRES, a real estate pro with Intero Real Estate Services in Los Altos, Calif., says it’s common in the Silicon Valley market for sellers to request a 3% earnest money deposit, which is often due within one business day after the buyer’s offer is accepted. Considering the median sales price there was $2.1 million in May 2024, the deposit could amount to $63,000.

“One of the primary concerns sellers and listing agents have when entertaining offers is certainty, meaning how serious the home buyer is and the likelihood of them closing,” says Matt Weaver, a mortgage loan originator at CrossCountry Mortgage in Boca Raton, Fla. “Home buyers placing 3%, 5% and sometimes up to 10% for earnest money helps demonstrate the level of seriousness. … The amount of earnest money plays a role and speaks volumes to both the seller and the listing agent representing the property.”

The following market dynamics could influence earnest money deposits:

• Competitive markets: In hot seller’s markets, buyers may want to offer larger earnest money deposits—up to 5% or even 10% of the purchase price. “This is to help make their offer more attractive to the sellers and possibly better compete against other buyers,” Wemyss says.
• Buyer’s markets: “In areas where the market favors buyers, we’re seeing some negotiate for lower earnest money amounts, like around 1% to 2%,” Wemyss says.
• High-value properties: In luxury real estate, earnest money deposits often are substantially higher—sometimes reaching hundreds of thousands of dollars, Wemyss says.
• Regional variations: Some regions have seen trends toward fixed earnest money amounts rather than percentages of a home sale price. A common range is $5,000 to $10,000 in some areas regardless of home price, he says.
• New-home construction: Builders may require buyers who purchase newly built homes to put down larger earnest money deposits, possibly as much as 10% of the purchase price. Builders may even require the ability to use the earnest money for construction rather than holding it in an escrow account, Gassett says.

Make sure buyers don't confuse these two terms:

• Down payment: This is the money that a buyer puts toward the purchase price on a home. The down payment is due at the time of closing.
• Earnest money: This is the “good faith deposit” a buyer pays to the seller when making an offer on a home to demonstrate the buyer’s commitment to the purchase. Earnest money is not required but has become standard practice in many areas of the country.

Leveraging Earnest Money in Negotiations

Earnest money also can help ensure that the buyer doesn’t make offers on multiple houses simultaneously, potentially leaving the seller in the lurch. Buyers are not automatically forbidden from making offers on other properties when they pay an earnest deposit, but few are likely to forfeit the money.

Wemyss says earnest money can be a powerful negotiation tool to make a buyer’s offer stand out. Strategies include:

Higher deposits: Offering a larger earnest money deposit can signal a buyer’s financial stability and serious intent, Wemyss says.

Faster release: Buyers can offer to release the earnest money to the seller earlier in the process, further reducing the seller’s risk.

Non-refundable portions: Buyers can make part of the earnest money non-refundable after certain contingencies are met.

Shortened contingency periods: Buyers can pair larger earnest money deposits with shorter contingency periods to make an offer more appealing.

How Earnest Money Is Managed

A buyer typically will pay earnest money via a certified check, personal check or wire transfer. The funds are then deposited into an escrow account and held by a representative agreed to by the buyer or seller, whether that’s an attorney, real estate agent, agent of a title company or another third party. The holder of the earnest money should be outlined in the purchase contract. Some states, like Ohio, may require a real estate broker to hold onto the earnest money deposit.

To protect the buyer’s funds, earnest money should be held securely in an escrow account until closing or any disputes are resolved. During this time, the buyer and seller will be unable to access the funds.

What Happens to Earnest Money at Closing?

Earnest money is returned to the buyer at closing. The buyer can choose whether to apply the funds toward a down payment, closing costs or other settlement costs. But in some cases, if certain provisions of the purchase contract are broken, the buyer will have to forfeit the earnest money and the seller will keep it.

Scenarios Where Earnest Money Is Returned

No buyer’s agent wants to tell their client that the earnest money deposit is gone. That’s why “buyer’s agents and their clients should review the terms given in the purchase agreement contract to find out exactly how refunds are dealt with,” Gassett says. “It’s imperative for buyer’s agents to educate their clients in these matters.”

Contingency clauses in a purchase contract are used as added layers of protection for a buyer’s earnest money against potential scenarios that could derail a transaction. For example, buyers may make an offer that is contingent on an appraisal or home inspection. But agents should caution buyers that including too many contingencies in a purchase contract could make their offer less attractive to a seller, so they’ll need to weigh the risks.

Some common contingencies included in a purchase contract that could help protect a buyer’s earnest money are:

• Appraisal contingency: If a home appraises at a value less than what the buyer agreed to pay, the buyer will be able to get their earnest money deposit back if both parties don’t agree to an amended purchase price.
• Home inspection contingency: If a home inspector finds major material issues with the home, and the seller refuses to make the requested repairs or adjust the sales price, a buyer can back out of the deal and still keep their earnest money.
• Financing contingency: Buyers will get their earnest deposit refunded if they’re unable to secure financing for the home. An example is if the buyer is unable to qualify for a mortgage during the underwriting of the loan or if the property doesn’t meet the lender’s standards.
• Contingency around the sale of an existing home: This protects the buyer’s earnest money if the buyer is unable to sell their current home.

Outside of contingencies, another way a buyer would be refunded their earnest money is if a transaction fell through because the seller decided to back out for any reason.

Scenarios Where Earnest Money is Forfeited

A buyer’s agent should warn their client that in certain situations, the buyer could lose an earnest money deposit. Some buyers may be unaware of the risk. “It’s important to note that earnest money deposits can become non-refundable when certain timelines within the contract are passed, such as inspection, loan approval and closing date,” Weaver says.

Real estate agents can help their clients avoid pitfalls by emphasizing the importance of adhering to the terms of the purchase contract, explaining how failing to meet essential financing or home inspection deadlines, for example, could prevent the buyer from getting a refund on the earnest money deposit.

Can You Get Earnest Money Back?

Earnest money gets refunded to the buyer if …

• A seller terminates a transaction
• Contingencies included in the purchase contract, such as a home inspection, appraisal or financing, are unable to be resolved

Example: Jenny makes an offer on a home with an earnest deposit of $5,000, but she discovers the house is infested with termites following a professional home inspection. She decides not to buy the property and gets her earnest money back because she had a home inspection contingency included in the purchase agreement.

Earnest money gets forfeited to the seller if …

• The buyer misses key contractual deadlines without agreeable, valid extensions
• The buyer changes their mind outside of the contingency periods
• The buyer breaches the purchase contract and did not include a contingency (e.g. home inspection, financing, appraisal, etc.)
• The buyer designated their earnest money as a non-refundable deposit when making their offer
• The buyer finds a different property and decides to not proceed with the original purchase

Example: Jenny makes an offer on a home with an earnest money deposit of $10,000. But Jenny’s mortgage financing falls through, and she is forced to back out of the transaction. But Jenny did not include a financing contingency in the purchase contract. Therefore, the seller is able to keep the $10,000 earnest money as compensation for having to take the property off the market.

Reality check: Regardless of a contract breach, sellers don’t always keep the earnest money. Both the listing agent and the buyer’s agent have to sign off on the deposit for it to be released. The truth is “it is often more simple to refund the deposit and move forward getting the house sold than go to arbitration or court, trying to keep the deposit,” Wemyss says. But buyers should still be aware of the risks and not assume they can always get the earnest money back if they violate the purchase contract.

3 Tips for Managing Earnest Money

Real estate agents can take these steps to help protect their client’s earnest money deposit:

1. Educate Clients

Buyer’s agents and listing agents should explain earnest money deposits to their clients, including why they’re necessary and how they can affect the homebuying process. First-time home buyers, in particular, may be unaware of how earnest money deposits work. “Thorough education can prevent misunderstandings that might lead to disputes or legal issues,” Wemyss says. Also, “knowledgeable clients can make better decisions about offer strategies and risk management.”

2. Clarify Earnest Money Terms

Review contingency options that can be included in the purchase contract, such as inspection and financing, and how these could provide added protection for earnest money deposits. Maintain thorough documentation and ensure clients are clear on the situations that can put their earnest money in jeopardy. Agents also should help their clients keep close tabs on contractual deadlines.

3. Stay Updated on Local Regulations

Real estate agents should stay informed about local and state regulations regarding earnest money. Some areas have different legal requirements surrounding earnest money, such as who manages the escrow account. For example, in North Carolina, the deposit is held in an escrow account managed by a third party, such as a real estate brokerage or an attorney. Some areas also offer more flexibility around how and when earnest money is deposited in a transaction. In Illinois and Rhode Island, buyers can pay the earnest money deposit in two installments: after contract signing and during due diligence or after an inspection. Also, agents should understand specific legal requirements and practices in their areas, such as what the typical earnest money deposit is for their marketplace.

Final Thoughts

Real estate agents should clarify earnest money terms with their clients and make sure they’re informed about how certain contingencies may help safeguard their deposits. But as always, agents should have their clients consult with a local real estate attorney for specific legal advice or guidance on laws regarding earnest money, contractual interpretations and resolving disputes.

“Understand that strategically using earnest money can significantly impact real estate transactions,” Wemyss says. “By staying informed about current trends, knowing how to use earnest money deposits effectively and educating your clients thoroughly, you can navigate this aspect of real estate with confidence and professionalism.”