An earnest money deposit is cash a buyer puts up shortly after signing a purchase contract to show the seller the offer is serious. Understanding how earnest money deposits work matters because the money — typically 1% to 3% of the purchase price — sits in a third-party escrow account throughout the transaction, gets credited toward your down payment or closing costs at closing, and can be refunded or forfeited depending on why the deal ends. On a $400,000 home, that’s usually $4,000 to $12,000 at stake, so the contract terms around it deserve a careful read before you sign.
How Much to Offer
No law fixes the amount. According to the National Association of REALTORS®, deposits range from 1% to as much as 10% of the purchase price depending on local customs and market conditions, with most falling in the 1% to 3% band.1National Association of REALTORS®. Earnest Money in Real Estate: Refunds, Returns and Regulations In a competitive market with multiple offers, pushing toward 3% or higher signals financial strength. In a softer market, a flat $1,000 to $2,000 can be perfectly acceptable, especially on lower-priced properties.
Property type shifts the practice. Residential deals almost always use a percentage. Rural land and foreclosure purchases lean toward fixed dollar amounts. A larger deposit doesn’t raise your total cost, since it’s credited back at closing, but it does tell the seller you’re not likely to walk.
What the Written Agreement Must Cover
The purchase contract, or a separate earnest money addendum, spells out the terms. At minimum the document needs the exact dollar amount, the deadline for delivering funds (usually one to three business days after mutual acceptance), and the name of the party holding the money. The holder is typically a licensed escrow company, a title company, or the brokerage representing one side. Your full legal name and the property’s legal description belong on the paperwork too.
The contingency clauses matter more than any of that. They define the circumstances under which you get your deposit back. The agreement should also spell out what counts as a default. Under most standard contracts, missing a key deadline without a valid extension can result in forfeiture of the deposit to the seller.1National Association of REALTORS®. Earnest Money in Real Estate: Refunds, Returns and Regulations Read the default language before you sign.
Contingencies That Protect the Deposit
Contingencies are the safety valves. Each one gives you a defined window to investigate something about the property or your finances, and if the results are unacceptable, you can walk away with the deposit intact. Waiving contingencies to make an offer more competitive is a calculated risk that can cost you the full amount if the deal falls apart.
The most common contingencies in residential contracts:
- Inspection contingency. You hire a professional inspector and, based on the findings, can negotiate repairs, request a price cut, or cancel. Without it you buy the home as-is.
- Financing contingency. If your lender denies the mortgage, you can exit and recover the deposit. Waiving this means you need cash to close or you lose the money.
- Appraisal contingency. If the home appraises below the contract price, you can renegotiate or cancel. Without it you cover the gap out of pocket.
- Title contingency. Lets you cancel if a title search turns up liens, boundary disputes, or other ownership problems that can’t be cleared before closing.
- Home sale contingency. Ties your purchase to selling your current home, typically within 30 to 60 days.
Each contingency has a deadline written into the contract. Miss it by a day and the protection expires, converting a refundable deposit into a forfeitable one.
Delivering the Funds
Once both parties sign, the clock starts. Most contracts give you one to three business days to get the funds to the escrow holder. The two common methods are a domestic wire transfer through your bank and a certified or cashier’s check delivered to the escrow office. Wire transfers cost about $25 to $30 at most banks; a certified check avoids that fee but takes a trip in person. Ask for a written receipt when the funds land, and keep it with your closing paperwork. If the money doesn’t arrive by the contractual deadline, the seller may have grounds to terminate.
Verify Wire Instructions by Phone
Real estate wire fraud is one of the more costly scams targeting homebuyers. A typical scheme has a criminal intercept email between the buyer and the title company, then send the buyer fraudulent wiring instructions routing the deposit to an account the criminal controls. Once wired, the money is usually gone.
Verify all wiring instructions by calling a number you already have for the escrow or title company, not a number pulled from the email. Treat any last-minute change to wire instructions as suspect. After sending, call the escrow company right away to confirm receipt.2National Association of REALTORS®. Consumer Guide: How to Protect Against Real Estate Wire Fraud Five minutes on the phone can save the entire deposit.
How the Escrow Account Holds the Money
The escrow holder places your deposit into a trust account kept separate from the company’s own operating funds.3American Land Title Association. Best Practices: How to Document Your Escrow Trust Account Policies That separation is required by real estate regulations and professional conduct rules in every state. The money sits there, untouched, until one of three things happens: the transaction closes, the contract is canceled through a valid contingency, or a dispute forces legal resolution.
Neither buyer nor seller can unilaterally tell the escrow holder to release the funds. If the deal closes, the money flows into settlement. If the contract is properly terminated under a contingency, the deposit goes back to the buyer. If both parties claim it, the holder typically won’t release the funds without written mutual consent or a court order.
What Your Lender Will Want to See
If you’re financing, your lender will look closely at where the deposit came from. Fannie Mae’s selling guide requires lenders to verify that deposit funds came from an acceptable source whenever the deposit counts toward the borrower’s minimum contribution. Expect the lender to review bank statements covering at least the prior two months to confirm your account held enough to support the deposit. If you paid by personal check, the statements need to run through the date the check cleared.4Fannie Mae. Earnest Money Deposit
Unusually large deposits draw extra scrutiny. Fannie Mae specifically directs lenders to closely evaluate large earnest money deposits and deposits exceeding the amount customary for the area.4Fannie Mae. Earnest Money Deposit If you can’t show the money came from your own account, the lender will require documentation tracing its origin.
When a family member or other third party provides the deposit as a gift, the lender needs a signed gift letter with the dollar amount, a statement that no repayment is expected, and the donor’s name, address, phone number, and relationship to you.5Fannie Mae. Personal Gifts Proof of the transfer from the donor’s account into yours may also be required. Have this ready before you submit the loan application.
How the Deposit Applies at Closing
When the sale closes, the escrow holder releases the earnest money and the settlement agent credits it toward your down payment and closing costs. On the Closing Disclosure, the deposit appears as a line item under “Paid Already by or on Behalf of Borrower at Closing” in the Summaries of Transactions section.6Consumer Financial Protection Bureau. Closing Disclosure Explainer That figure reduces the cash-to-close amount you owe at the table. The deposit doesn’t lower the purchase price; it’s money you already paid, subtracted from what you still owe. It also becomes part of your cost basis in the home for tax purposes when you eventually sell.7Internal Revenue Service. Publication 551, Basis of Assets
When You Forfeit the Deposit
Forfeiture happens when the buyer defaults without a valid contingency. The common scenarios are backing out because you changed your mind, failing to secure financing after waiving the financing contingency, and missing contractual deadlines without an extension.1National Association of REALTORS®. Earnest Money in Real Estate: Refunds, Returns and Regulations The seller then typically has the right to keep the deposit as compensation for the time the property was off the market.
Waiving contingencies in a hot market is where most buyers get burned. Drop the inspection contingency to strengthen an offer, then discover the home needs a $30,000 foundation repair, and your options narrow to proceeding, absorbing the repair, or walking and losing the deposit.
Disputes Over the Deposit
When both sides claim the money and can’t agree, the escrow holder is stuck. In most states the holder cannot release the funds without a written mutual release signed by both parties or a court order. Many purchase contracts require mediation before either party can sue, and mediation resolves a significant share of these disputes without litigation.
If mediation fails, the escrow holder can file an interpleader action, depositing the disputed funds with the court and asking to be released from further liability. A judge then decides who gets the money based on the contract and the evidence. The holder’s attorney fees for the interpleader often come out of the deposit itself, so on a $5,000 deposit, litigation costs can eat most of what’s left. That math is why experienced agents push hard for a negotiated split.
Tax Treatment
If the sale closes, there’s nothing special to report. The deposit becomes part of the home’s purchase price and cost basis, which matters when you eventually sell.
If the deal falls through and you lose the deposit, the IRS states that forfeited earnest money is not deductible for the buyer.8Internal Revenue Service. Publication 530, Tax Information for Homeowners You cannot write off the loss on your return, regardless of the amount.