What Is Earnest Money?
Earnest money is your good-faith deposit. It tells the seller you're not a tire-kicker. You wire it (or deliver a check) to an escrow or title company within a few days of contract acceptance. It sits there until closing—when it gets applied to your down payment or closing costs. If you walk away within your contingencies—financing fell through, inspection revealed a deal-killer, appraisal came in low—you get it back. If you breach the contract (walk without a valid reason), the seller may keep it. Typical amount: 1–3% of purchase price. In Memphis, $2,500 on a $120,000 deal is common. In Denver or Austin, 3–5% can signal seriousness in a bidding war.
A deposit you put down when your offer is accepted—to show you're serious. It's held in escrow until closing and typically refundable if you back out for a valid reason under your contingencies.
At a Glance
- What it is: A deposit held in escrow that proves you're committed to the purchase.
- Why it matters: Strengthens your offer; shows the seller you're not wasting their time. Higher amounts can signal seriousness in competitive markets.
- Typically refundable when: You invoke a valid contingency (financing, inspection, appraisal) and exit per contract terms.
- At risk when: You breach—walk without a valid contingency or miss deadlines.
How It Works
You make an offer. The seller accepts. The contract specifies how much earnest money you'll deposit and when. Usually within 3–5 business days. You wire it to the escrow or title company—never directly to the seller. They hold it in a neutral account.
Until closing: The money sits there. If you satisfy all contingencies and close, it gets applied to your down payment or closing costs. If you back out for a valid reason (invoke a contingency before the deadline), you get it back—minus any processing fees, depending on your contract. If you breach—you walk without a valid contingency, or you miss a deadline and the seller can argue you've defaulted—you may forfeit it. The seller could sue for damages beyond the earnest money if the contract allows, but often the earnest money is the limit.
Amount: No hard rule. 1% is common in slower markets. 2–3% in moderate markets. 5% or more in feeding frenzies when you're trying to stand out. On a $200,000 deal, 2% = $4,000. That's real money—enough to focus your mind on closing the deal, but not so much that losing it would ruin you. Don't over-commit. If the deal goes wrong and you legitimately invoke a contingency, you want it back. If you breach, you've accepted the risk.
Real-World Example
Indianapolis 3-bed. $165,000 contract. Earnest money: $3,300 (2%). You wire it to the title company within 3 days.
Week 2: Inspection finds a cracked foundation. Repair estimate: $12,000. You invoke the inspection contingency, request a $10,000 credit. Seller refuses. You walk. You get your $3,300 back—minus a $50 wire fee. Total refund: $3,250.
Same deal, different outcome. You waive the inspection contingency to win the offer. You close. After closing, you discover the foundation issue. No recourse. The earnest money went toward your down payment. You're stuck with the repair. That's the cost of waiving contingencies—you're betting your deposit (and more) that the property is what you think it is.
Pros & Cons
- Strengthens your offer—sellers take you seriously when real money is on the line.
- Protects you when you have contingencies—walk for a valid reason and get it back.
- Applied to your purchase at closing—it's not an extra fee; it's part of your down payment.
- Higher amounts can win in competitive markets when you're up against multiple offers.
- At risk if you breach—walk without a valid contingency and you could lose it.
- Ties up cash until closing or refund—you can't use it for another deal in the meantime.
- Wire fraud risk—always verify wiring instructions by calling the title company on a known number you looked up yourself.
Watch Out
- Execution risk: Wire fraud is real. Scammers send fake wiring instructions via email. You wire $4,000 to a criminal's account. It's gone. Always call the title or escrow company using a number you found independently (their website, your agent's records). Never wire based solely on email instructions.
- Compliance risk: Earnest money handling varies by state. Some require it to be held in a specific type of account. In a dispute, the escrow holder may interplead—deposit the funds with the court—until the parties resolve who gets it. Know your state's rules.
- Modeling risk: Don't over-commit. If you put down 5% ($10,000 on a $200,000 deal) and you're waiving contingencies, you're betting $10,000 that nothing goes wrong. If the appraisal comes in low and you've waived that contingency, you either bring the gap or you lose the deposit. Size your earnest money to what you can afford to lose if the deal goes sideways.
Ask an Investor
The Takeaway
Earnest money is your skin in the game. It shows the seller you're serious and gets applied to your purchase at closing. If you exit via a valid contingency, you get it back. If you breach, you could lose it. Typical amount: 1–3% of purchase price. Wire it to escrow—never the seller. And verify those wiring instructions by phone. Every time.