Earnest Money: How Much, When, and What Happens If a Deal Falls Through

Earnest money — sometimes called a "good faith deposit" — is the funds a buyer puts up to prove they are serious about a purchase contract. It is held in escrow by a neutral third party and applied to the buyer's closing costs or down payment at closing. If the deal collapses, who keeps the deposit depends on *why* it collapsed.

How much

Earnest money customs vary widely:

In a competitive market, sellers read earnest money as commitment signal — a buyer offering 3% earnest is more attractive than one offering 1%, all else equal. But putting up more does increase your downside if the deal falls apart for an uncovered reason.

Where it sits

Earnest money is wired or check-deposited within 1-3 business days of contract execution. The custody options:

1. Title or escrow company — most common in the western US (CA, AZ, WA).
2. Listing brokerage's escrow account — common in the eastern US.
3. Closing attorney's IOLTA trust account — common in attorney-state markets (NY, MA, GA, NC, SC).

Whoever holds it has fiduciary duty. They cannot release the funds without either both parties' written authorization or a court order. This is non-negotiable — never wire earnest money to an individual or to the seller directly.

The contingency map

A standard purchase contract has three protective contingencies for the buyer:

• Inspection contingency (usually 5-15 days): buyer can void and recover earnest money for any reason found in inspection.
• Appraisal contingency (until appraisal received, often 14-21 days): buyer can void if appraised value is below sale price and seller will not adjust.
• Financing contingency (usually 21-30 days): buyer can void if loan is denied despite good-faith effort.

While these contingencies are active and properly invoked, the buyer's earnest money is recoverable. Once they expire or are waived, the protection is gone.

Scenarios — who keeps the money

Buyer is refunded:

• Inspection finds material defects, buyer cancels within inspection period.
• Appraisal comes in low, seller will not negotiate, buyer cancels within appraisal period.
• Loan denied with documented good-faith application, financing contingency still active.
• Title issues discovered, seller cannot deliver clean title.
• Seller defaults (refuses to close, sells to someone else, fails to perform).

Seller keeps the deposit:

• Buyer simply walks away after contingencies expire.
• Buyer fails to perform required tasks (no loan application, no inspection ordered) without invoking contingency.
• Buyer cannot close on financial grounds with no financing contingency in place.

Disputed:

• Both parties claim entitlement. Funds are held in escrow until written agreement, mediation, or judgment. This can take months.

Waiving contingencies — read carefully

In bidding wars, buyers sometimes waive inspection or appraisal contingencies to make their offer more attractive. This is a real risk:

• Waiving inspection means earnest money is forfeited if you back out for any reason discovered after inspection.
• Waiving appraisal means you guarantee to make up any shortfall in cash if the appraisal comes in low.
• Waiving financing means earnest money is forfeited if your loan falls through, regardless of cause.

If you waive, do it deliberately — and pre-approval, an inspection done before offer (a "pre-inspection"), and bring-extra-cash math should all be in place.

State variations

States differ on what counts as "good faith" for keeping earnest money. Some require formal mediation before forfeiture. A few states (notably Texas, where the option fee is a separate non-refundable amount) have hybrid structures.

Our state policy table tracks these variations. When you submit an offer through our platform, the contingency template and earnest money handling specific to your state are pre-filled.

The practical advice

1. Match earnest money to the market, not what feels comfortable. Too low = uncompetitive offer. Too high = unnecessary downside.
2. Always wire from your own account directly to escrow. Never to the seller, never to the agent.
3. Keep a copy of the wire confirmation and the escrow company's receipt.
4. Track contingency expiration dates in writing. The day a contingency expires is the day your protection ends.

Earnest money is the cheapest insurance you will buy in the entire transaction — but only if you understand what you are insuring against.