Real Estate Transactions
What Is Earnest Money?
Earnest money — also called a good faith deposit — is a sum of money a buyer submits with a purchase offer to demonstrate serious intent to complete the transaction. It signals to the seller that the buyer is committed and reduces the risk of frivolous offers.
Earnest money is one of the most frequently tested topics on state real estate licensing exams. You need to understand how it's held, when it's refundable, and what happens when a deal falls apart.
How Earnest Money Works
How Much?
Earnest money varies by market. In most markets, 1–3% of the purchase price is standard. In competitive markets, buyers sometimes offer 3–5%+ to strengthen their offer. On a $400,000 home, typical earnest money ranges from $4,000–$12,000.
Where It's Held
Earnest money must be held in an escrow or trust account — never co-mingled with the broker's operating funds. It's held by the listing broker, buyer's broker, title company, or escrow company depending on local practice and contract terms.
When It's Refundable
Earnest money is refundable to the buyer when a transaction fails due to a valid contingency: financing contingency, inspection contingency, appraisal contingency, or other contractual contingency. Failing contingencies protects the buyer's deposit.
When Seller Keeps It
If the buyer backs out without a valid contingency reason, the seller may be entitled to keep the earnest money as liquidated damages. This is a key negotiated term in most purchase contracts and varies by state law.
Exam Key Points: Earnest Money
Earnest money must be held in a separate trust or escrow account
Never co-mingle earnest money with a broker's personal or business funds
Earnest money is NOT the same as a down payment — it applies toward the purchase price at closing
Contingencies protect the buyer's right to recover earnest money
Without a valid contingency, a buyer who backs out may forfeit the deposit
The holding party (broker, title company) does not own the funds — they hold them in trust
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