Earnest money works like a good-faith deposit: after a seller accepts your offer, you place 1% to 3% of the purchase price (sometimes more) into an escrow account held by a neutral third party, and that money sits there until the deal closes or falls apart. If closing goes through, the deposit is credited toward your down payment and closing costs. If the deal collapses, whether you get the money back depends on why it collapsed and what your contract says.
How Much You Should Put Down
The amount is negotiable. There’s no legally required minimum or maximum in most situations, and the figure you choose is a signal to the seller about how serious you are. On a $400,000 home, 1% to 3% works out to $4,000 to $12,000. In a competitive market with multiple offers, buyers sometimes go to 5% or higher to stand out. In slower markets, 1% is often enough.
A larger deposit tells the seller you have liquid assets and are unlikely to walk. A smaller one may cause a seller weighing competing offers to pick someone else. Whatever you offer is at risk if you default outside the protections written into your contract, so the number should reflect both the market and what you can afford to lose in a worst case.
Where the Money Goes and How You Send It
Your deposit doesn’t go to the seller. It goes to a neutral holder named in the purchase agreement — usually a title company, escrow company, real estate attorney, or a brokerage’s trust account. The contract should identify the exact entity and specify whether the escrow account bears interest and who gets any interest earned.
Most contracts require the deposit within one to three business days after both parties sign. Wire transfers are the most common method because they clear quickly and confirm fast. Cashier’s checks and certified checks are widely accepted but can take longer. Personal checks are sometimes used but introduce banking delays.
The funds have to arrive by the contract deadline. Banking delays generally don’t excuse a late deposit, and missing the deadline can give the seller the right to cancel and accept a different offer. Once the escrow holder receives your money, they issue a receipt or validated deposit slip. Keep it. Your lender will likely ask for a copy during underwriting.
Protect the Wire From Fraud
Wire fraud in real estate transactions is common and hard to recover from. Scammers spoof emails from title companies, agents, or attorneys and send fake wiring instructions that route your deposit to a thief’s account. Once the wire goes out, the money is often gone for good.
- Verify wiring instructions by phone using a number you looked up independently, not one from the email itself. Read every digit back verbally.
- Don’t click links in emails claiming to provide updated wiring instructions. Go to the title company’s website directly or call.
- Treat any last-minute change to previously provided wiring instructions as a red flag until you’ve confirmed it through a separate channel.
- After sending the wire, call the escrow holder to confirm the funds landed in the correct account.
If you think you’ve been targeted, call your bank immediately and file a report with the FBI’s Internet Crime Complaint Center at ic3.gov.
Contingencies That Let You Get Your Money Back
Contingencies are conditions written into your purchase agreement that let you cancel and reclaim your deposit if specific things go wrong. Without them, changing your mind usually costs you the money. The standard set:
- Inspection contingency. You get a set window, often 7 to 14 days, to have the home professionally inspected. If problems turn up and you and the seller can’t agree on repairs or a price cut, you can cancel and get the deposit back.
- Financing contingency. If your mortgage application is denied within the contract’s timeframe, you can withdraw without forfeiting earnest money.
- Appraisal contingency. If the home appraises below the purchase price and you and the seller can’t renegotiate, you can cancel for a full refund.
- Title contingency. Lets you back out if a title search turns up liens, boundary disputes, or ownership claims the seller can’t clear before closing.
Every contingency has a deadline. To cancel under one, you generally have to give the seller written notice before that deadline. Once a contingency period expires, that protection is gone, and canceling for the same reason afterward can cost you the deposit.
Extra Protection for FHA and VA Buyers
If you’re financing with an FHA or VA loan, federal rules add appraisal protection that applies whether or not your contract has a standard appraisal contingency.
FHA loans require an amendatory clause in the purchase contract whenever you haven’t received a written appraised value before signing. It says you don’t have to complete the purchase or forfeit your earnest money if the FHA-appraised value comes in below the sales price. You can still proceed at the contract price if you choose.1U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook 4000.1
VA loans carry a similar mandatory escape clause. It must appear in every VA-financed purchase contract and says you won’t forfeit your earnest money or face any penalty if the purchase price is higher than the reasonable value the Department of Veterans Affairs establishes.2Veterans Benefits Administration. VA Escape Clause – VA Home Loans
These protections can’t be waived, even in a bidding war. If your agent or lender forgets to include the clause, the protection still applies by operation of federal regulation.
What Happens to the Deposit at Closing
If the sale closes, your earnest money is credited toward what you owe at the closing table. You can apply it to the down payment, closing costs, or other settlement charges. If you owe $50,000 at closing and you deposited $10,000, you bring $40,000. The credit shows up as a line item on the final settlement statement.
When You Lose the Deposit
If you back out after your contingency periods have expired and you don’t have a legally valid reason, the seller is generally entitled to keep the earnest money as liquidated damages — compensation for the seller’s lost time and for taking the home off the market while it was under contract with you. Common ways buyers forfeit:
- Cold feet after the contingency deadlines have passed. Simply changing your mind isn’t a protected reason once those windows close.
- Missing a contractual deadline, such as the earnest money delivery date or the closing date.
- Deciding to buy a different home. That doesn’t entitle you to a refund unless a contingency still applies.
Some states cap what a seller can keep as liquidated damages at a percentage of the purchase price. Others rely on a general reasonableness standard. Read the liquidated damages provision before signing so you know the maximum amount at stake.
When the Seller Is the One Who Walks
Sellers can breach too, by refusing to close, accepting a higher offer, or failing to meet their obligations. When that happens, you’re entitled to a full refund of your earnest money. If the seller refuses to release it, you may have to take legal action to recover it.
Beyond getting the deposit back, you generally have two other options:
- Specific performance. You can ask a court to order the seller to complete the sale. Courts grant this in real estate cases more often than in other contract disputes because each property is considered unique, and money alone may not compensate you for losing the home.
- Damages. You can sue for financial losses caused by the breach, such as the cost of buying a comparable home at a higher price, temporary housing, and other out-of-pocket expenses tied to the contract.
If you suspect the seller may try to sell to someone else while your claim is pending, talk to a real estate attorney about filing a notice against the property’s title.
Disputes Over Who Gets the Money
When a deal falls apart, disagreements over the deposit are common. The escrow holder generally won’t release the funds to either side without a signed release from both parties or a court order. Until then, the money stays in escrow.
Many purchase agreements require mediation or arbitration before litigation. If that fails, or the contract doesn’t require it, the escrow holder can file an interpleader action, which deposits the disputed funds with a court and asks a judge to decide who gets them. This can take months, and legal costs can outrun the amount in dispute.
Keep written records of every deadline, notice, and communication. Timely written notice is usually the deciding factor in whether a cancellation was valid under the contract’s contingency provisions.
Non-Refundable Earnest Money
In competitive markets, sellers sometimes ask that all or part of the deposit be non-refundable. Buyers occasionally offer this voluntarily to make an offer stand out. It means you agree to forfeit that portion even if you cancel for a reason that would otherwise trigger a refund.
The risk is real. If the inspection reveals problems, if financing falls through, or if the appraisal comes in low, you could lose the money anyway. Some contracts stage the arrangement so the deposit becomes non-refundable only after specific contingencies have been satisfied, which preserves some protection early in the process. Before agreeing, get clear on exactly which events would still allow a refund and which would not.
Tax Note on a Forfeited Deposit
If you forfeit your earnest money on a home purchase, the loss is generally not tax-deductible. The IRS lists forfeited deposits, down payments, and earnest money among items you can’t deduct as home-related expenses.3Internal Revenue Service. Publication 530 – Tax Information for Homeowners