June 26, 2026
Earnest money, sometimes called a good faith deposit, is money you put down after your offer gets accepted to show the seller you're serious about actually closing on the home. Think of it as a financial handshake. An earnest money deposit shows a seller that the buyer's interest is legitimate and that they intend to close on the home.
It's not an extra fee on top of your purchase price. The money you put down as earnest money becomes part of your overall payment for the home. It just happens earlier in the process than your down payment or closing costs.
This trips people up constantly, so let's clear it up. Your earnest money deposit happens right after your offer is accepted, and it sits in escrow while the deal moves toward closing. Your down payment, on the other hand, is paid at the closing table itself.
Here's the part that makes this easier to understand: your earnest money typically counts toward your down payment. So if you're buying a $400,000 home with a 5% down payment, that's $20,000 total. If you already put down $8,000 in earnest money, you'd only need to bring the remaining $12,000 to closing.
Your earnest money should never go directly to the seller, the seller's agent, or anyone with a financial stake in the deal. Instead, it goes into escrow, which means a neutral third party holds the funds until the transaction either closes or falls through.
Escrow is a financial agreement in which a third party, such as an attorney or another settlement or title agent, controls payments between the buyer and seller, only releasing the funds once all the terms of the contract are met. In most of the country, that neutral third party is a title company.
Outside of New York's higher local custom, earnest money deposits nationally typically range from 1 to 3 percent of the purchase price, though they can run anywhere from 1 to 10 percent depending on how competitive the market is. There's no law requiring a specific amount. A few things tend to influence the number: how hot the market is, how large your down payment will be, what contingencies you're including, and what the seller specifically prefers.
In competitive situations, a larger deposit can make your offer look stronger, but it's worth weighing that against the risk. The more money you put at risk, the more painful it is if something goes wrong.
This depends entirely on your contract's contingencies, which are specific conditions that let you walk away without losing your deposit. The most common ones cover financing, home inspection, and appraisal. If your mortgage falls through, if the inspection turns up serious problems, or if the appraisal comes in below the sale price and the seller won't budge, you're generally entitled to your deposit back, as long as you act within the timeframes your contract specifies and put your notice in writing.
Where buyers run into trouble is when they miss a contingency deadline or waive a contingency to make their offer more competitive. If you back out of a deal for a reason that isn't covered by a contingency in your contract, the seller is typically entitled to keep your deposit. This is exactly why reading your contract closely, ideally with your attorney walking you through it, matters so much before you sign anything.
Disclaimer: This content is intended for informational and educational purposes only and is not intended to be construed as legal, tax, financial, or insurance advice. Every property and tax situation is unique. Please consult a licensed attorney, CPA, or tax professional regarding your specific circumstances before making any decisions related to property improvements, tax assessments, or real estate transactions. Mohammed M. Rahman is a licensed real estate broker in New York. Contact: Mo@ClosedByMo.com.
