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What is an earnest money deposit?

Key insights: 

  • Earnest money is a good-faith deposit that shows a seller you’re committed to moving forward with buying a home 
  • Deposit amounts typically range from 1% to 3% of the home’s price but may be higher in competitive markets 
  • If a deal falls through due to valid contingencies in the purchase agreement, earnest money is usually refundable

An earnest money deposit is a sum of cash that you submit with an offer on a house. It shows the seller you’re really interested in the home. The money is typically held in escrow during the closing period and applied toward your down payment or closing costs if the deal goes through.

What is earnest money for?

When you’re ready to put in an offer on a house you love, you want to do everything possible to stand out from other potential buyers. And the seller? Well, they want to make sure that the offer they accept ends with a successful sale—not the potential buyer (you) walking away. While it’s not a must-do in the homebuying process, earnest money helps achieve both goals by showing the seller you’re ready to make a deal and serious about the purchase agreement’s terms. Pairing a strong earnest money deposit with early financing preparation, such as securing a Citi SureStart® Preapproval, can help reinforce your offer by showing sellers that both your finances and your intent are solid.

How much does your earnest money deposit need to be?

The question everyone asks first: How much is this going to cost me? Typically, earnest money is 1 to 3% of the home’s purchase price. So, around $3,000 to $9,000 on a $300,000 house.

How much money should an earnest money deposit be?

The earnest money you need usually ranges from 1% to 3% of a home’s price, but this isn’t a strict rule. In a hot market with many bidding wars, more earnest money may help your offer seem more appealing. Some buyers may consider offering 5% or even 10% to show they’re prepared to move forward. Some sellers may prefer a round number, like $5,000 or $10,000, regardless of the home’s price.

Remember, you might need to show where this money comes from, as well as how long it’s been in your account.

Here’s a nice detail: Some loan programs, including Citi's HomeRun® mortgage, may allow this money to be a gift fund once the borrower has met the minimum borrower contribution from their own funds. That’s right—you don’t have to handle everything by yourself. In this case, the lender usually needs proof that the money is a gift and does not need to be paid back.

What happens to earnest money at closing?

 So, where does earnest money ultimately go? When the closing day arrives, your earnest money deposit goes toward what you owe at closing. In many cases, it’s applied to your down payment, but it may also be used to cover certain closing costs, depending on how the purchase agreement is structured.

When is earnest money refundable?

Your earnest money can come back to you if things don’t work out, but only if certain conditions, or contingencies that are listed on your purchase agreement, are met. Here are a few to be aware of:

  • Home inspection contingency: Let’s paint a picture. You find a dreamy house, but your inspector uncovers some major issues. For example, the roof needs replacing or the foundation isn’t sound. A home inspection contingency provision allows you to cancel the purchase agreement and get your earnest money back without a fuss.
  • Appraisal contingency: What if the house appraises for less than the purchase price you offered? If you have an appraisal contingency in the purchase agreement, you can renegotiate the price with the seller or cancel the agreement and receive a full refund of your earnest money. No harm, no foul!
  • Financing contingency: What happens if your loan approval doesn’t go through? Well, if you have a financing contingency in your purchase agreement, there’s a good chance you can still get your earnest money deposit back. This contingency is like a safety net—it’s there to protect you. But there’s a catch: You need to provide your lender with all the information they require to properly assess and approve your loan. If your loan doesn’t go through because you missed submitting some important details, you might not get your earnest money back. 
  • Contingency for selling an existing home: Need to sell your current home before you can close? You’re not alone there. To protect your earnest money, you should consider including a contingency for selling your existing home before closing on the purchase of the new home.

Should you waive a purchase agreement contingency? 

Waiving a contingency can be tempting, especially if you’re in a competitive market. But it’s a risk. Without contingencies, your earnest money could be on the line if things don’t go as planned.

How to protect your earnest money

Safeguard your earnest money every step of the way. Here’s how:

Step 1: Use an escrow account

Always opt to route your earnest money through an escrow account, if possible. It’s safer than handing it directly to the seller and keeps your funds protected.

Step 2: Know your contingencies

Understanding the ins and outs of your purchase agreement’s contingencies is your safety net, so lean on your real estate agent or legal advisor if you have any questions.

Step 3: Stay on track with your responsibilities

Stay vigilant. Keep a close eye on deadlines and requirements. Staying in sync with the purchase agreement’s timeline ensures that you don’t miss a deadline and forfeit your earnest money.

Step 4: Put it all in writing

Get every agreement and every change in writing. This not only protects your earnest money but also clarifies any adjustments to the purchase terms.

Earnest money in action

Let’s examine how earnest money functions in some real-world scenarios—that you’ll hopefully never have to face.

The forfeited deposit 

Say you put down earnest money on three homes and plan to decide later which one you’ll buy. We get it—it’s nice to have options. However, unless you have a contingency that allows for recovery of the earnest money, the sellers you don’t choose may keep your deposits as compensation for taking their properties off the market. Hey, it’s only fair. 

The failed offer 

Here’s a tough scenario: You lose your job and can’t get a mortgage after your offer is accepted. If you don’t set a financing contingency, you might lose your earnest money. But if you do, you may recover the deposit and regroup without financial stress. Make sure to always carefully read your purchase agreement.

Earnest money FAQs

  • Earnest money is money a buyer submits with a purchase offer to show they’re serious about making a deal. It’s typically 1% to 3% of the sale price and is parked in an escrow account until closing. If the sale closes, the funds are applied to the buyer’s down payment or closing costs. If the deal falls through due to a valid contingency, like a failed home inspection or financing issue, the buyer is usually entitled to a full refund of the deposit.

  • Earnest money is usually refundable if the sale falls through for a reason covered by the contract, like a failed home inspection, low appraisal or financing difficulties. But if you back out for a reason not listed in the agreement, the seller may keep the deposit. Always carefully review your contingencies to protect your money.

  • Earnest money typically ranges from 1% to 3% of the home’s purchase price, but in competitive markets, you may need to offer more. In hot housing markets where bidding wars or cash offers are common, putting down 5% or more may help your offer rise to the top. Some sellers may also prefer a fixed amount, like $5,000 or $10,000, regardless of the home price.

  • If a deal falls through due to a reason specified by the contract, like a failed home inspection, low appraisal or financing issues, the buyer typically receives their earnest money back. However, if the buyer backs out without a valid contingency or misses key deadlines, the seller may keep the deposit as compensation for lost time and opportunity.

  • While both earnest money and a down payment involve putting money toward a home purchase, they serve different purposes. Earnest money is a smaller, good-faith deposit made early in the process to show the seller you’re serious about buying the home. A down payment, on the other hand, is a larger sum paid at closing that goes directly toward the purchase price of the home and helps secure your mortgage. If the deal closes, your earnest money is usually applied to your down payment or closing costs.

  • Earnest money is typically held in an escrow account by a neutral third party, such as a title company, escrow company, real estate brokerage or attorney. This ensures the funds are protected and not in the hands of either the buyer or seller while the transaction moves forward.

  • Yes, earnest money can be applied to your closing costs. If the home purchase progresses as expected, the earnest money you deposited typically goes toward either your down payment or closing costs.

  • If you change your mind and decide against moving forward with the home purchase for a reason not covered by a contingency in your contract, you could lose your earnest money. This is because the seller may have taken the home off the market in good faith, and the deposit helps compensate them for losing time and potential buyers. However, if you withdraw due to valid contingencies, like a failed inspection or financing issues, you’re typically entitled to a refund of your earnest money.

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