An earnest money deposit is the good-faith payment a buyer puts down when a seller accepts an offer on a home, typically 1% to 3% of the purchase price, held in a neutral escrow account until closing. It signals that you’re financially committed to the deal and gives you a window to complete inspections, line up financing, and clear the other conditions in your purchase agreement. Real estate contracts must be in writing to be enforceable under the statute of frauds, and your deposit serves as the initial consideration that binds the deal.1Legal Information Institute. Statute of Frauds At closing, the money becomes part of what you pay for the home. If the deal collapses, who keeps it depends on why.
How Much To Put Down
On a $400,000 home, 1% to 3% works out to somewhere between $4,000 and $12,000. Some buyers offer a flat dollar figure instead of a percentage, which is fine as long as the seller agrees. There is no federal minimum. The number is entirely negotiable.
Market conditions drive the figure as much as price does. In a hot seller’s market with competing offers, a deposit above the typical range makes your bid stand out and tells the seller you have skin in the game. When inventory is high and buyers are scarce, sellers often accept less. The deposit needs to be meaningful enough that walking away would actually sting — that’s what gives the seller confidence you’ll follow through.
New construction is its own category. Builders commonly ask for 1% to 5%, and custom or high-end projects can push that to 10%. They’re committing months of labor and materials based on your contract, so the deposit terms are usually non-negotiable and spelled out in the purchase agreement before you sign.
Getting the Money Into Escrow
Once both parties sign the purchase agreement, the clock starts on getting the deposit into a neutral third-party account. The escrow holder is typically a title company or a licensed escrow agent named in the contract. Most agreements require delivery within a few business days of the effective date, by wire transfer, certified check, or personal check.
The escrow agent sends wiring or delivery instructions that include the bank routing number, account number, and a reference tied to your transaction. Once the funds land, you get a receipt. Hold onto it. That receipt is your proof you’ve met the first financial obligation under the contract.
The escrow agent is a fiduciary with a legal duty to safeguard the money and release it only according to the written instructions signed by both parties. The seller cannot touch the funds before closing, and neither can you without the other party’s consent or a court order. If your deposit arrives late, the seller could treat it as a breach, so don’t delay.
Whether the money earns interest depends on the agreement and local practice. Some contracts specify an interest-bearing trust account; others don’t. On a 30- to 60-day escrow the interest is modest, but on a larger deposit or a longer new-construction timeline it adds up. If it matters to you, get it in writing before signing.
Keeping Your Deposit Safe From Wire Fraud
Wire fraud aimed at real estate transactions is one of the fastest-growing financial crimes in the country. In 2025, the FBI’s Internet Crime Complaint Center received over 12,000 complaints related to real estate fraud, with losses exceeding $275 million.2FBI Internet Crime Complaint Center. 2025 IC3 Annual Report The typical scheme: a criminal hacks into an email thread between you, your agent, and the title company, then sends convincing but fraudulent wiring instructions that route your deposit to the wrong account. Once the wire goes through, the money is usually gone within minutes.
Before sending any funds:
- Verify wiring instructions by phone using a number you looked up independently from the title company’s website or your original paperwork, not from the email containing the instructions.3National Association of REALTORS. Consumer Guide: How to Protect Against Real Estate Wire Fraud
- Pick up the instructions in person at the title company’s office when you can; that eliminates email interception entirely.
- Treat any last-minute change to wiring details as a red flag. Title companies and lenders don’t suddenly change bank accounts. Verify by phone before acting.3National Association of REALTORS. Consumer Guide: How to Protect Against Real Estate Wire Fraud
- Call the escrow agent immediately after you send the wire to confirm receipt.
If you think you’ve been hit, contact your bank immediately to attempt a wire recall and file a complaint with the FBI’s IC3 at ic3.gov. The chance of recovery drops sharply after the first few hours.
Contingencies That Let You Get It Back
Contingencies are the contractual conditions that let you cancel the deal and recover your deposit if certain things go wrong. Without them, you can lose thousands of dollars for reasons completely outside your control. Every purchase agreement should include the ones that fit your situation, and you need to know the deadlines attached to each.
Inspection
This gives you the right to hire professionals to evaluate the property. If inspections turn up foundation damage, a failing roof, faulty electrical, or similar problems, you can negotiate repairs or cancel. To keep your deposit protected, deliver written notice of cancellation within the inspection period stated in the contract, often somewhere between five and fifteen days. Miss that window and you may lose the right to cancel under this contingency entirely.
Financing and Appraisal
A financing contingency protects you if your mortgage application gets denied. You submit the denial letter to the escrow agent and get your deposit back. The appraisal contingency works similarly: if the home appraises for less than the purchase price and you and the seller can’t agree on a revised price, you can exit with your deposit intact. Both have firm deadlines. Let them expire without acting and you’re proceeding without a safety net.
Title
A title search runs during escrow to confirm the seller has clear ownership and that no liens, easements, or legal claims cloud the title. If the search uncovers problems that can’t be cleared before closing, a title contingency lets you cancel and recover your deposit. Title issues are more common than buyers expect: unpaid taxes, old mortgages that were never properly released, boundary disputes. This contingency keeps you from inheriting someone else’s legal headaches.
Deadlines Are the Whole Game
Every contingency has a specific expiration written into the contract, and most purchase agreements include a “Time is of the Essence” clause that makes those dates legally binding. If your inspection period runs through March 15 and you send your cancellation notice on March 16, you may have just forfeited your deposit. Keep a calendar of every deadline and work backward from each one so you have enough time to get reports, review them, and act.
When a Deposit Becomes Non-Refundable
In competitive markets some sellers demand that part or all of the earnest money be non-refundable from the start. Buyers sometimes offer this voluntarily to strengthen a bid, and builders frequently require it on new construction.4National Association of REALTORS. Earnest Money in Real Estate: Refunds, Returns and Regulations
Non-refundable means what it sounds like. If the deal falls through for any reason not covered by a remaining contingency, you lose the money. The risk is real and often underestimated. If your financing collapses, the appraisal comes in low, or the seller can’t deliver clear title, the word “non-refundable” creates ambiguity about whether you’re still entitled to a refund even when the failure was beyond your control. Some contracts handle this well by specifying which contingencies still override the non-refundable designation. Others don’t, and that’s where buyers get burned.
Before agreeing, understand which contingencies you’re waiving and which you’re keeping. If the language isn’t crystal clear, have an attorney review it. The few hundred dollars for legal review is cheap insurance against losing a five-figure deposit.
What Happens If Someone Backs Out
If You Walk Away
If you cancel for a reason not covered by any contingency, you’re in default. In most purchase agreements the seller keeps your earnest money as liquidated damages — pre-agreed compensation for the time the property sat off the market and the costs the seller incurred during the failed transaction.4National Association of REALTORS. Earnest Money in Real Estate: Refunds, Returns and Regulations A deposit of 1% to 3% almost always holds up as a reasonable estimate of harm. An unusually large deposit that looks more like a punishment than compensation can be struck down as an unenforceable penalty, and some states cap the percentage a seller can retain.
If the Seller Walks Away
When the seller breaches by refusing to close, accepting a higher offer, or failing to disclose material defects, you get your full deposit back. You can also sue for additional losses such as the cost difference if you end up buying a comparable home at a higher price, temporary housing, and fees for inspections and loan applications. In some cases you can ask a court to force the seller to complete the sale, a remedy called specific performance; courts are more willing to grant it for real estate than for other contracts because every property is considered unique. You’ll need to show you were ready, willing, and financially able to close on the scheduled date. In practice, most seller defaults end with the deposit returned and both sides moving on. Litigation is expensive and slow.
When Buyer and Seller Both Claim the Deposit
If you disagree about who gets the money, the escrow agent can’t pick sides. The funds sit frozen until both parties sign a mutual release. Many purchase agreements require mediation before either side can sue, and some penalize parties who skip it by disqualifying them from recovering attorney fees later even if they win. If mediation fails, the escrow agent can file an interpleader action, depositing the funds with the court and asking a judge to decide who gets them. The agent’s legal costs typically come out of the deposit itself, which gives both sides a reason to settle. Small claims court is also an option in many jurisdictions for smaller disputes.
What Happens at Closing
When the deal reaches the finish line, your earnest money stops being a security deposit and becomes part of your purchase funds. The escrow agent transfers it to the settlement ledger, and it shows up as a credit to you on the Closing Disclosure. You can apply it to your down payment, closing costs, or other settlement charges.4National Association of REALTORS. Earnest Money in Real Estate: Refunds, Returns and Regulations
Federal law requires your lender to deliver the Closing Disclosure at least three business days before the closing date so you have time to review every line item, including your earnest money credit.5Consumer Financial Protection Bureau. Regulation 1026.19 – Certain Mortgage and Variable-Rate Transactions If your deposit exceeds what you owe at closing, the surplus comes back to you. Check the disclosure carefully to confirm the full deposit amount is reflected. Mistakes happen, and this is your last chance to catch them before signing.
Once the deed is recorded and the seller receives proceeds, the earnest money is fully disbursed. At that point it becomes part of your cost basis in the home, which matters later if you sell and need to calculate gain or loss for tax purposes.6Internal Revenue Service. Publication 551 (2025), Basis of Assets
Tax Consequences If the Deal Falls Through
If the transaction closes normally, there’s nothing special to report. The deposit is just part of what you paid for the home. The tax questions come up when the deal collapses.
If you’re the buyer and you forfeit your deposit because you defaulted, you can’t deduct the loss. Forfeited earnest money is explicitly listed as a nondeductible expense for homebuyers.7Internal Revenue Service. Publication 530 (2025), Tax Information for Homeowners You cannot claim it as a capital loss or write it off against other income. From a tax standpoint, the money is simply gone.
If you’re the seller and you keep a forfeited deposit, the IRS treats it as income. For residential property that was your personal home, a forfeited deposit is generally ordinary income rather than capital gain because you’re not selling an asset, you’re keeping payment for a contract that fell through. A Tax Court ruling confirmed this treatment for real property, holding that forfeited deposits from terminated sale contracts don’t qualify for capital gains treatment. Report the retained deposit on your return for the year you received it.