What Is Earnest Money?

Earnest money is a good-faith deposit you make on a home to show the seller you're serious about buying. The money is deposited after the seller has accepted your offer and is usually kept in an escrow account. When the sale closes, you can keep the cash or apply the money toward the purchase.

Although it's not required, be prepared to offer earnest money when shopping for a house, especially in a tight housing market. Otherwise, you'll have a hard time competing against other buyers.

» MORE: How to make an offer on a house

How does earnest money work?

After accepting an offer, the seller takes the home off the market until the sale closes, which can take more than a month. Earnest money shows the seller that the buyer is serious about purchasing the home. It also provides the seller with some financial protection if the buyer backs out of the deal without a valid reason.

Your purchase agreement will spell out how the earnest money deposit is handled. Typically, the money is kept in an escrow account held by an escrow company, a real estate title company or the seller's real estate agency.

🤓Nerdy Tip

Don't give the earnest money directly to the seller because you might have trouble getting it back if things go awry.

At closing, the earnest money is typically applied toward your closing costs or down payment. However, if you violate the terms of the purchase agreement without a valid reason, you may have to forfeit the deposit to the seller.

» MORE: What down payment is required?

Is earnest money refundable?

Earnest money can be refundable, but it depends on the terms of your purchase agreement. The purchase agreement will include contingencies. These outline the circumstances under which you can walk away from the deal without losing your earnest money.

Common contingencies that let you keep your earnest money deposit include:

Mortgage contingency: You're unable to secure financing within the required timeline.
Appraisal contingency: The appraisal comes in lower than the sale price.
Inspection contingency: The home inspection uncovers problems, and you can't negotiate a solution, such as a lower price or the seller paying for repairs.

Work closely with your real estate agent to decide what contingencies you want to include in the contract.

In competitive markets, some buyers agree to nonrefundable earnest money, which means the seller gets to keep the cash if the sale falls through, regardless of the reason. If you're tempted to use this strategy, make sure you understand the risks and don't offer money you can't afford to lose.

When can the seller keep my earnest money?

The seller may keep the earnest money if you break the terms of the purchase agreement, such as missing deadlines in the contract or deciding not to buy the home because you found a better property.

Have your real estate agent walk you through the entire purchase contract before you sign anything. Make sure you understand your end of the bargain and in what circumstances you would keep or forfeit the earnest money.

» MORE: Steps to buying a house

NerdWallet writer Isabella Angelos contributed to this story.

Frequently Asked Questions

Is earnest money required?

It's not required, but sellers usually expect buyers to offer an earnest money deposit to show they're serious about buying the house.

How do I know how much earnest money to offer?

Ask your real estate agent for guidance. Your agent will have a good feel for the market and sellers' expectations.

What is the difference between earnest money and a down payment?

Earnest money is a good-faith deposit you put on a house when making an offer to show your commitment to the seller. When the sale closes, you can get the cash back or use it to pay closing costs or the down payment.

A down payment is the cash you pay upfront to buy a house, and it serves as your initial ownership stake in the property. The down payment amount depends on your lender's requirements and the type of mortgage, as well as your financial circumstances.

Will I lose the earnest money if the home fails the inspection?

You won't lose the earnest money if your purchase contract includes a contingency — an out — if the inspection turns up problems and you decide not to buy the home as a result.

You're our first priority.Every time.

What Is Earnest Money?

How does earnest money work?

Is earnest money refundable?

When can the seller keep my earnest money?

You're our first priority.
Every time.