What Is Earnest Money? Definition, Deposit Amount, and How It Works

• Earnest money is a good-faith deposit that shows a buyer is serious about purchasing a home. 
• The earnest money deposit is typically 1% to 3% of the home’s purchase price. 
• Earnest money could be refundable depending on the terms of the purchase agreement and contingencies. 
• Earnest money helps secure a new construction home while it’s being built.
• At closing, earnest money is applied toward closing costs, down payment, or other expenses.

What Is Earnest Money? Definition, Deposit Amount, and How It Works

Buying a home comes with plenty of new terms, and earnest money is one you’ll likely hear early in the process. If you’re wondering what is earnest money, it’s a deposit that shows a buyer is serious about moving forward with a home purchase. Let’s break down how it works, especially when buying a new construction home.

What is Earnest Money in Real Estate?

In real estate, the earnest money definition is a good-faith deposit a buyer provides after their offer is accepted. This deposit shows the buyer’s commitment to moving forward and gives the seller confidence they intend to complete the purchase.

The deposit is held in an escrow account and applied toward the buyer’s costs at closing. It is not an additional fee; it becomes part of the buyer’s overall investment in the home.

How Much is a Typical Earnest Money Deposit?

The amount required varies depending on the market, seller, and purchase agreement. In many cases, a typical earnest money deposit is around 1% to 3% of the home’s purchase price.

For example, on a $400,000 home, a buyer may provide a deposit between $4,000 and $12,000. Some markets or sellers could require more, so it’s important to review the terms of your contract with your real estate agent.

Is Earnest Money Refundable?

A buyer’s deposit can be refundable depending on the terms outlined in the purchase agreement. If a buyer backs out for a reason covered by a contingency, such as certain financing or inspection issues, they might be able to receive their funds back.

However, if a buyer cancels the purchase without a valid reason outlined in the contract, they could risk losing the deposit. Understanding your agreement and deadlines is key throughout the homebuying process.

Does Earnest Money Work Differently for New Construction Homes?

When purchasing a new construction home, earnest money to be deposited is typically required earlier in the process to secure the home or homesite while construction moves forward.

Builders can have different deposit requirements depending on the community, home design, and purchase agreement. Because new homes are built specifically for the buyer, this deposit helps confirm the buyer’s commitment during construction. Learn more about the steps involved in purchasing a new construction home in our Complete Guide to Buying a New Home.

What Happens to Earnest Money at Closing?

At closing, the deposit is credited toward the buyer’s down payment, closing costs, or other approved expenses. Instead of being an extra cost, it helps reduce the amount the buyer needs to bring to the closing table.

Understanding what is earnest money and how it fits into the homebuying process can help you feel more confident when purchasing your next home. For more tips on navigating the purchase process, explore our First Time Homebuyers Guide.

FAQ

What is earnest money in real estate?

Earnest money is a good-faith deposit a buyer provides after an offer is accepted to show their commitment to purchasing a home.

How much is a typical earnest money deposit?

A typical earnest money deposit is often 1% to 3% of the home’s purchase price, but the amount can vary based on the market and purchase agreement.

Is earnest money refundable?

Earnest money may be refundable depending on the terms of the purchase agreement and whether certain contingencies are met.

Does earnest money work differently for new construction homes?

New construction homes might have different earnest money requirements since the deposit helps secure the home while it is being built.

What happens to earnest money at closing?

At closing, earnest money is typically applied toward the buyer’s down payment, closing costs, or other approved expenses.