What is Earnest Money in Real Estate?

Earnest money (also called a good faith deposit) is a sum of money that a buyer deposits when making an offer on a property to demonstrate their serious intent to complete the purchase. The earnest money is held in an escrow or trust account — typically managed by the listing broker, title company, or escrow agent — and is applied toward the buyer's closing costs or down payment at closing. The amount of earnest money varies but is typically 1% to 3% of the purchase price, though it can be higher in competitive markets.

Earnest money is not required by law to create a valid contract (consideration can be anything of value, including a promise), but most sellers expect it and a larger deposit can make an offer more competitive. If the buyer defaults on the contract without a valid contingency, the seller may be entitled to keep the earnest money as liquidated damages, depending on the contract terms and state law. However, if the buyer properly exercises a contingency (such as failing to obtain financing or an unsatisfactory inspection), the earnest money is typically refunded in full.

Disputes over earnest money can be resolved through mediation, arbitration, or court action. In most states, the broker cannot release earnest money from the trust account without written agreement from both parties or a court order. Commingling earnest money with personal or business funds is a serious violation that can result in license revocation.