What Is Earnest Money?
Earnest money is a good-faith deposit a buyer pays after an offer is accepted, held by a neutral third party such as a title or escrow company until closing. It is credited toward the buyer's costs at closing, and matters because the buyer can lose it by backing out for a reason the contract does not allow.
Earnest Money in plain English
Earnest money is a good-faith deposit you make soon after the seller accepts your offer. It shows you are serious, and it is held by a neutral party - often a title company, escrow agent or brokerage - rather than the seller.
If the sale closes, the deposit is credited toward your down payment and closing costs. If you cancel for a reason the contract allows, such as a failed inspection contingency, you normally get it back.
Worked example
Earnest money from offer to closing
Illustrative example - round numbers, not current market data. Calculated with Reaixo's calculator engines.
Assumptions
- Offer price
- $400,000
- Earnest money
- 1.5% of price
- Down payment and closing costs
- $40,000 and $9,000
| Step | Calculation | Result |
|---|---|---|
| 1. Deposit with the offer | $400,000 × 1.5% | $6,000 |
| 2. Owed at closing before the credit | $40,000 + $9,000 | $49,000 |
| 3. Cash still due at closing | $49,000 − $6,000 | $43,000 |
Earnest money deposit: $6,000. The $6,000 is not an extra cost: it is credited toward what the buyer owes at closing. It is at risk only if the buyer backs out for a reason the contract does not allow.
What this calculation leaves out
- Deposit amounts are set by negotiation and local custom, not by law.
- Who holds the deposit and the deadline to pay it are set by the contract.
Try it: Earnest Money with your own numbers
Interactive and illustrative: change any value and the results update instantly in your browser. The figures come from the same engines as REAIXO's full calculators.
Cash to close: from total owed to the wire amount
Cash to close is what you bring on closing day: everything you owe, less money already paid and credits from the seller or lender.
- Total owed
- $52,000
- Down payment, costs and prepaids
- Cash to close
- $45,000
- Usually sent by wire
Show the numbers as a table
| Step | Amount |
|---|---|
| Down payment | +$40,000 |
| Closing costs | +$9,000 |
| Prepaids and escrow | +$3,000 |
| Earnest money already paid | −$5,000 |
| Seller and lender credits | −$2,000 |
| Cash to close | $45,000 |
Formula
Cash to close = Down payment + Closing costs + Prepaids − Earnest money − CreditsAssumptions
- Credits can pay closing costs and prepaids, not the down payment; lenders cap them.
- Your Closing Disclosure states the exact figure at least three business days before closing.
- Confirm wire instructions by phone with your closing agent - wire fraud is common.
The home-buying timeline, step by step
A typical financed U.S. purchase. Open a step to see what happens, the money involved and the usual timing. Your contract sets the real deadlines.
A lender reviews your credit, income and assets and states how much it is prepared to lend.
Timing: Before you search; letters are often valid for about 60 to 90 days.
Terms: pre approval, dti, credit score
You compare homes against your budget, including taxes, insurance and HOA dues - not just the price.
Timing: As long as it takes.
Terms: piti, comparable sales
You propose a price, contingencies, deadlines and any seller concessions; the seller accepts, counters or rejects.
Timing: Responses usually come within a day or two.
Terms: counteroffer, contingency, seller concession
Both sides sign the purchase contract, which sets every deadline that follows.
Timing: Day 0 of the contract.
Terms: under contract, contingency
You pay the good-faith deposit to the neutral holder named in the contract.
Money: Often about 1% to 3% of the price, by local custom.
Timing: Usually within a few business days of signing.
Terms: earnest money, escrow
A home inspector checks the condition; you can negotiate repairs or credits, or cancel within the inspection contingency.
Money: Inspection fees are paid up front.
Timing: Commonly 7 to 14 days after signing.
The lender's appraiser estimates value. A low appraisal can create a gap you must cover or renegotiate.
Money: The appraisal fee is often paid at application.
Timing: Commonly 2 to 3 weeks after signing.
Terms: appraisal, appraisal gap, appraisal contingency
The lender verifies everything and issues conditions, then "clear to close". Avoid new debt or large unexplained deposits.
Timing: Runs in parallel with the steps above.
Terms: underwriting, clear to close, rate lock
You confirm the home is in the agreed condition and any repairs are done.
Timing: Usually within a day or two of closing.
Terms: final walkthrough
You sign the loan and transfer documents and pay cash to close; you receive the keys. The Closing Disclosure arrives at least three business days before.
Money: Cash to close is due, usually by wire.
Timing: Commonly 30 to 45 days after signing for a financed purchase.
Terms: closing, cash to close, closing disclosure
Timing ranges are common practice, not rules. Cash purchases can close in one to two weeks.
Why it matters
If a buyer backs out for a reason not covered by a contingency, the seller may be entitled to keep the earnest money.
It is cash you must have available within days of an accepted offer, well before closing. A larger deposit can make an offer more competitive, but it also increases what you could lose if you default.
What it means for you
Who pays?
The buyer.
When is it paid?
Shortly after the offer is accepted, by the deadline in the contract - often within a few business days.
What happens if something goes wrong?
If buyer and seller disagree about who is entitled to the deposit, the holder generally keeps it until both sign a release or a court or arbitrator decides.
What buyers should know
Put every contingency deadline in your calendar - the deposit is protected only while those rights are still open.
What sellers should know
A larger deposit with fewer contingencies signals a buyer more likely to close.
Common mistakes
- Missing a contingency deadline, which can turn a refundable deposit into one the seller may keep.
- Wiring the deposit using instructions from an unverified email.
- Forgetting that the deposit is a credit at closing, not an additional cost.
Compare and common questions
Earnest Money: frequently asked questions
How much earnest money should I put down?
There is no legal standard; it is negotiated and follows local custom, often around 1% to 3% of the price. Your agent can tell you what is typical where you are buying.
Do I get my earnest money back?
Yes, if the sale closes (as a credit) or if you cancel under a contingency or other contract right before its deadline. If you walk away without a contractual reason, the seller may be entitled to keep it.
Who holds earnest money?
A neutral third party named in the contract, such as a title company, escrow agent, attorney or the listing brokerage's escrow account - not the seller directly.
Is earnest money the same as a down payment?
No, but it becomes part of it. The deposit is credited at closing toward your down payment and closing costs.
Related Terms
Where it fits
- Buying a home, Offer & Negotiation: next, Counteroffer.
Recommended next step
See how the deposit fits into the total cash you need.
Cash-to-close calculator →Sources and review
- Closing Disclosure explainer, Consumer Financial Protection Bureau. Supports: Deposits already paid are credited in the Cash to Close calculation on the Closing Disclosure.
Where this applies: United States. Amounts, deadlines and remedies are set by the purchase contract and state law, which vary; confirm with your agent or a real estate attorney.
Last reviewed: · Updated:
Examples use illustrative figures; rules of thumb are labelled as such. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.
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