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As you’ve searched for your next home, you finally arrive at the perfect property. You and your agent successfully negotiate the terms of the sales contract. Your next step is to provide an earnest money deposit. What exactly is this deposit, and where does it go?
Check your home buying eligibility. Start here (Nov 4th, 2026)
Earnest Money Shows How Earnest You Are
When the seller agrees to your offer, the home goes into a “contract pending” status. This means you alone are the one buying the house. The seller can take other offers, called backup offers, but you have sole rights to buy that property.
Earnest money is an amount, typically a small percentage of the sales price, that you and the seller negotiate. You deposit it with a third party, such as an escrow agent or title company. The exact amount depends on local custom and the strength of the local housing market.
In hotter markets, sellers may ask for more.
This deposit is your pledge of good faith to the seller. It shows you’re not going to back out of the deal on a whim. After all, the seller took the home off the market on your behalf, and your deposit is hard evidence you’ll proceed as the sales contract prescribes.
Where Does Earnest Money Go?
You won’t give your earnest money check directly to the seller. Instead, a third party holds the money in trust. This third party may be the closing agent (also called an escrow agent), a real estate broker or an attorney, as the sales contract specifies. The closing agent handles the paperwork and the fund transfers at closing.
As long as you’ve done what the sales contract requires, your deposit goes toward the down payment and closing costs. Any amount not used for these purposes comes back to you at closing.
How to Keep Your Earnest Money Safe
Here are some things to remember to make sure your deposit stays safe.
The Closing Date
Say the contract sets your close date as the 30th. If you don’t close on or before that date, you could lose your deposit as well as the property, depending on the contract’s terms. Once the closing date has passed, you risk losing the house to another buyer if other offers are pending.
This is why it’s so important to have a knowledgeable, reputable lender who understands the importance of purchase closing dates. It’s not common for the seller to yank your deposit over a missed closing date, but it can happen. Why take the risk?
Stick to the Contract
You may also lose your deposit if the deal falls through for any reason not spelled out in the contract.
Most contracts also have a clause that requires loan approval from a mortgage company by a specific date. It often goes by the name “financing addendum” or “financing contingency.” This clause prompts the buyers to get their documentation to their mortgage company in a timely manner.
A sure fire way to lose an earnest money deposit is to simply walk away from the deal on a whim. Say a buyer makes an offer, the seller accepts it and both parties sign the sales contract. The buyers make their deposit. Then, two weeks later, they change their minds simply because they decided they didn’t like the neighborhood after all. By walking away, the would-be buyers lose their deposit money.
It may seem like a good reason to you. But if the reason for walking away isn’t in the contract, it won’t be valid to the seller.
Getting Earnest Money Back
Okay, so let’s say the deal does fall through for a valid reason.
There are many reasons a buyer may walk away. One of the most common is an unsatisfactory property inspection. Say that a home inspector completes the report and you find that the foundation is in need of repair. Your sales contract is contingent upon receiving a satisfactory inspection report. You don’t want to buy a home in this condition. So, you can walk away and get your earnest money back.
Or perhaps the backyard fence is in need of repair. You might counter that the seller reduce the price by an amount equal to fence upgrades. If the seller refuses, your inspection contingency may let you cancel the contract and get your deposit back.
Sometimes the home’s appraised value is lower than the purchase price. If the seller refuses to drop the price, the buyer can walk away without penalty when the contract has an appraisal contingency. FHA and VA loans generally require a contract clause that protects your earnest money in this case.
In these cases, the escrow holder returns your deposit as the contract directs. If the seller disputes the refund, the money may stay in escrow until you both agree in writing or a court decides. Then you start looking for another home.
It Pays To Know About Earnest Money
In short, earnest money deposits ensure the buyers fulfill their side of the bargain. They also protect the seller from lost time. Sales contracts are real contracts, and their terms are performance requirements for both the buyer and the seller. Stick to the contract, and your deposit will be safe and sound.
Check your home buying eligibility. Start here (Nov 4th, 2026)
