Earnest money in real estate is a deposit made by a buyer to demonstrate their serious intent to purchase a property. It is also known as a good faith deposit. This money is typically paid when the buyer and seller enter into a purchase agreement, and it serves to assure the seller that the buyer is committed to the transaction while the property is taken off the market during the closing process
. The amount of earnest money usually ranges from about 1% to 3% of the home's purchase price, though in highly competitive markets it can be higher, sometimes up to 10%. The exact amount depends on local customs, market demand, and seller preferences
. Earnest money is held in an escrow account by a third party such as a real estate brokerage, title company, or legal firm until the transaction closes. If the sale completes successfully, the earnest money is applied toward the buyer’s down payment or closing costs. However, if the deal falls through due to contingencies specified in the contract-such as a failed home inspection or inability to secure financing-the buyer typically gets the earnest money refunded. If the buyer backs out without a valid reason as outlined in the contract, the seller may keep the earnest money as compensation for taking the home off the market
. In summary, earnest money is a financial commitment that protects the seller and signals the buyer’s serious intent to purchase a home, while also providing some security for both parties during the transaction process.
