Contract Deposits
Real Estate Earnest Money Explained
Earnest money is the deposit a buyer submits with their purchase offer to demonstrate serious intent. It's one of the most tested contract concepts on the real estate exam — and one of the most misunderstood in practice.
How Earnest Money Works
Earnest money (also called a good faith deposit) is submitted when a buyer's offer is accepted. It's held in escrow — usually by the listing broker, escrow company, or title company — until closing, at which point it's applied to the buyer's down payment or closing costs.
The amount is negotiable. In most residential markets, earnest money runs 1–3% of the purchase price. In competitive markets, buyers sometimes offer more to strengthen their offer.
Earnest money is not the same as a down payment. The down payment is paid at closing; earnest money is deposited earlier and later credited toward the total funds due at settlement.
What Happens If a Deal Falls Through
Whether the buyer gets their earnest money back depends entirely on the terms of the contract and what contingencies are in place.
If the buyer backs out for a reason covered by a contingency (financing falls through, inspection reveals major defects, appraisal comes in low), they typically get their earnest money returned. If the buyer backs out without a valid contractual reason — just changed their mind — the seller may be entitled to keep the earnest money as liquidated damages.
If the seller backs out, the buyer is typically entitled to a full refund of earnest money plus potentially additional damages.
Earnest Money FAQ
Who holds earnest money?
Earnest money must be held in a trust account by a licensed broker or escrow/title company. It cannot be commingled with the broker's operating funds — that's a serious license law violation.
Is earnest money required to form a valid contract?
No. Earnest money is not a required element of a valid real estate contract. Consideration (something of value) is required, but consideration can be the buyer's promise to pay — not necessarily an immediate deposit.
Can earnest money be in the form of a promissory note?
In some states, yes. A promissory note promising to deliver earnest money by a future date can be accepted. However, sellers can negotiate for cash deposits. The purchase contract specifies what form earnest money takes.
How quickly must earnest money be deposited?
State law and contract terms vary. Most contracts specify a deadline — often 1–3 business days after acceptance. Brokers must deposit earnest money promptly once received; state law often defines 'promptly' as within 1–3 business days.