When you’re ready to make an offer on a home, putting down an earnest money deposit (EMD) signals you’re serious. Sometimes called a “good faith deposit” or an “initial deposit,” the EMD shows sellers you’re committed to the purchase and helps solidify the deal while your transaction moves through inspections, financing and other closing steps. But what exactly is it, and what happens to that money if things don’t go as planned?
What Is an Earnest Money Deposit?
An EMD is a deposit made by the buyer once their offer on a home is accepted. It’s typically held in escrow by a neutral third party such as a title company until closing day when it is typically applied toward your down payment or closing costs at settlement.
How Much Earnest Money Do You Need?
In competitive markets, a strong EMD can help your offer stand out. The amount varies depending on your market and the price of the home, but here’s a typical breakdown:
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1% to 3% of the home’s purchase price is typical
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In competitive markets, deposits might rise to 5% or more
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Some buyers may offer a flat amount, especially for lower-priced homes or condos
Your real estate agent can help you determine a competitive amount based on local norms.
When Is an Earnest Money Deposit Refundable?
Your EMD is protected by the terms of your purchase agreement, which usually includes several contingencies. If these aren’t met, you may have the right to cancel the contract and get your deposit back.
Common refundable situations include:
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The home inspection uncovers serious issues
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The appraisal comes in lower than the purchase price
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You’re unable to secure financing
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The deal is contingent on the sale of your current home, and it doesn’t sell in time
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The seller backs out for any reason
In these cases, you can walk away with your EMD intact as long as you follow the timelines and terms laid out in the contract.
When Can You Lose Your Earnest Money Deposit?
On the flip side, the EMD can be forfeited to the seller if the buyer backs out of the deal without a valid contractual reason or fails to meet key deadlines without agreeable, valid extensions.
Examples include:
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Missing contingency deadlines or failing to act in good faith
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Changing your mind after waiving all contingencies
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Changing your mind in a non-contingent offer
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Deciding to walk away for personal reasons not covered in the contract
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Finding a different property and deciding to not proceed with the original purchase
That’s why it’s crucial to understand your rights, deadlines and protections, and to work with a knowledgeable agent who can help guide you through each step.
Where Does the Money Go?
If the deal goes through, the earnest money doesn’t disappear, it’s typically applied toward your down payment or closing costs at settlement. If the deal falls apart under the agreed-upon conditions, the money is either returned to you or awarded to the seller, depending on the contract terms.
Earnest money is more than just a deposit, it’s a sign of trust and a step toward homeownership. Understanding how it works can protect your investment, reduce stress and help ensure a smoother real estate experience.
If you’re buying a home in today’s market, especially in competitive areas like the Bay Area, working with a knowledgeable real estate professional can make all the difference in how your EMD is handled and protected.
