If you’re in the process of buying a home, you’ve likely heard the term “earnest money.”
While it’s often not as widely discussed as down payments or mortgage rates, it’s still one of the most important aspects of the homebuying process.
What's in this article?
This guide breaks down what earnest money is, how it works and how to protect your deposit, especially in today’s competitive real estate market.
What is earnest money?
Earnest money, sometimes called a “good faith deposit,” is a sum of money that a buyer provides when making an offer on a home.
This deposit shows the seller that you’re serious about buying the property and are willing to put skin in the game.
Key points about earnest money:
- Typically equals 1% to 5% of the purchase price
- Held in an escrow account, not by the seller
- Credited toward your down payment or closing costs at settlement (closing)
Earnest money is a way to protect both the buyer and seller during the homebuying process.
Once the seller accepts your offer, the home is taken off the market. Your earnest money helps ensure you stay committed through closing.
If you walk away from the deal without a valid reason (as outlined in the contract), you may forfeit the deposit.
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How much earnest money should you pay?
The amount you offer depends on the local market, the property’s desirability and your negotiation strategy.
In some highly competitive housing markets, buyers may offer a higher earnest money deposit to distinguish themselves from multiple bids.
General guidelines:
- 1% to 3% is standard in balanced or buyer-friendly markets
- 4% to 5% or more is common in competitive markets or with hot properties
- Some sellers ask for a flat amount (e.g., $5,000–$10,000) regardless of home price
A larger earnest money deposit may increase your credibility with the seller. It suggests you’re financially stable and genuinely committed to completing the purchase.
When do you submit earnest money?
Earnest money is typically submitted within 1–3 business days after the purchase agreement is signed by both parties. This timeline is often specified in the contract, so be sure to adhere to it closely.
The funds are deposited into an escrow account managed by a neutral third party such as a title company, real estate brokerage or real estate attorney.
The money stays there until closing day or until a deal is terminated under agreed terms.
Compass Mortgage pro tip: Always request a receipt or written confirmation of deposit from the escrow agent.
What happens to earnest money at closing?
When the transaction proceeds to closing, your earnest money is applied to your total funds needed to close. This could reduce your down payment or be credited toward closing costs.
For example, if you owe $10,000 at closing and have $5,000 in earnest money already in escrow, you would only need to bring the remaining $5,000 when you close.
Can you get your earnest money back?
Yes, under certain conditions. Whether or not your earnest money is refundable depends on the contingencies included in your purchase agreement.
Common contingencies that allow a refund:
- Home inspection: If significant problems with the home are uncovered (e.g., foundation cracks, electrical hazards) and the seller won’t address them, you can walk away and reclaim your deposit.
- Appraisal: If the property appraises below the purchase price, you can renegotiate or cancel the deal, provided the contract includes an appraisal contingency.
- Financing: If you’re unable to obtain a mortgage after a good-faith effort and a financing contingency was included, you may back out with your deposit refunded.
At Compass Mortgage, our Get Committed® program can help eliminate this risk.
With a fully underwritten loan commitment in hand even before you make an offer, sellers see you as a stronger buyer, and you’re more confident in your ability to close.
When might you forfeit earnest money?
Buyers typically forfeit their earnest money when they:
- Cancel the contract without a contingency or allowable reason
- Fail to meet critical deadlines (e.g., missing the inspection window)
- Experience cold feet or make a last-minute decision to back out
Additionally, if a buyer fails to perform (such as not submitting required documents or not attending the closing), the seller may have grounds to retain the deposit.
The exact consequences depend on the terms of the agreement.
How to protect your earnest money deposit
Protecting your earnest money starts with understanding your rights and responsibilities.
Here’s how to keep your deposit safe:
1. Use a trusted escrow agent
Never hand earnest money directly to the seller. It should always be placed in an escrow account held by a neutral third party.
2. Understand all contingencies
Review your contract carefully with your real estate agent. Understand the conditions that allow you to reclaim your deposit and what happens if the transaction falls through.
3. Follow the timeline
Meet all contractual deadlines for inspections, appraisals and financing. Use a calendar or task tracker to stay on top of critical dates.
4. Document everything
Keep written records of all communications and contract changes. Verbal agreements are not enforceable in most real estate transactions.
5. Work with experienced professionals
Your lender, agent and attorney play key roles in helping you stay compliant. Choosing a responsive and experienced team makes a major difference.
How Compass Mortgage supports you
At Compass Mortgage, we understand that buying a home is one of the biggest financial decisions you’ll ever make.
That’s why we offer tools and programs to help you move forward with confidence:
- Get Committed®: This exclusive program from Compass Mortgage provides a fully underwritten loan commitment before you find a home, making your offer stand out and reducing financing uncertainty.
- Fast closings: Close in as little as 15 days with our streamlined process, allowing you to move quickly when opportunity knocks.
- Expert guidance: Our loan officers provide personal attention and proactive communication to guide you every step of the way.
Whether you’re buying your first home, upsizing or investing, we treat you like family and tailor every solution to your needs.
Our nationwide reach and local expertise enable us to serve buyers in every state with a more creative and better mortgage experience.
Ready to buy a home with confidence?
Your earnest money is just one part of a smooth and successful homebuying journey. With Compass Mortgage as your partner, you gain clarity, speed and expert support.
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Secure your dream home with a lender who puts your goals first—because at Compass Mortgage, we believe in home loans with a personal touch.