Purchase Tips · May 28, 2025
How Earnest Money Works: Protecting Your Deposit When Buying a Home
Earnest money demonstrates your commitment to a purchase — but it can be at risk if you are not careful. Here is how it works, how much to offer, and how to protect it.
Earnest money is one of the most misunderstood elements of a real estate transaction. Here is a complete explanation.
What Is Earnest Money
Earnest money (also called a good faith deposit) is a deposit paid by the buyer shortly after an offer is accepted. It demonstrates to the seller that the buyer is serious and financially committed to completing the purchase.
Earnest money is held in escrow by the title company or real estate agency — not given directly to the seller. At closing, it applies toward your down payment and closing costs.
How Much to Offer
Typical range: 1-3% of the purchase price. In competitive markets, 2-3% or higher signals stronger commitment. Some markets have established norms — your buyer's agent can advise on local expectations.
On a $350,000 purchase: 1% = $3,500; 2% = $7,000; 3% = $10,500.
When You Get It Back (And When You Do Not)
You typically get your earnest money back if:
- The home inspection reveals significant issues and you exercise the inspection contingency
- Financing falls through and you have a financing contingency
- The appraisal comes in low and you have an appraisal contingency
- The seller cannot deliver clear title
You typically lose your earnest money if:
- You back out of the contract without a valid contingency
- You do not meet contract deadlines (inspection, financing) and have waived those contingencies
- You simply change your mind without contractual justification
Tips for Protecting Your Deposit
Never waive contingencies unless you understand the risk. Meet all contractual deadlines. Communicate immediately if you have concerns — do not wait until the last minute.
HMS ensures your financing contingency is satisfied well before deadline. Call 309-222-8286.