Skip to main content
Earnest money is a deposit made by buyers to demonstrate serious intent to purchase a property. The deposit is held in escrow until closing or contract termination. Earnest money protects sellers from buyers who make offers without genuine intent to close. It also creates financial stakes that keep transactions moving forward.

​
How It Works

When it’s paid: Typically within 3 business days of contract execution. Missing this deadline may constitute breach of contract. How much: Usually 1-3% of purchase price. Where it goes: Deposited into an escrow account held by the title company. Neither buyer nor seller can access funds until contract terms authorize release. At closing: Earnest money applies toward the buyer’s funds due at closing. It reduces the amount needed at the closing table but does not reduce the purchase price.

​
When Earnest Money Is Protected

Earnest money is returned to buyers when transactions terminate for valid contractual reasons.
If the buyer applies for financing in good faith but is denied, the earnest money is returned. This protects buyers from losing deposits due to loan denial.Important: The contingency must be in the contract. Waiving the financing contingency means earnest money is at risk if financing falls through.
If inspections reveal defects and the buyer and seller cannot agree on repairs or price adjustments, the buyer can terminate and receive their deposit back.Timelines matter: Inspection contingencies have deadlines. Missing them may waive the protection.
If the property appraises below the purchase price and the parties cannot agree on new terms, the buyer can terminate with earnest money returned.Appraisal gap addendums: Some contracts include provisions where buyers agree to cover a certain amount of appraisal shortfall. This limits protection.
If title defects are discovered that cannot be resolved, buyers can terminate and receive their deposit back.
If the contract is contingent on the buyer selling their current home and that sale falls through, earnest money is typically returned.

​
When Earnest Money Is at Risk

Earnest money may be forfeited to the seller when buyers breach the contract without valid contingency protection. Common scenarios:
  • Buyer changes mind after contingencies expire
  • Buyer misses critical contract deadlines
  • Buyer refuses to close after all conditions are met
  • Buyer waived contingencies and issues arise in those areas
  • Buyer cannot obtain financing after waiving financing contingency
Waiving contingencies to make offers more competitive increases earnest money risk. If financing falls through, appraisal comes in low, or inspections reveal problems, buyers may lose their deposit.Understand what protections exist in the contract before signing.

​
Disputes

When buyers and sellers disagree about who should receive earnest money, the title company cannot release funds without:
  • Written agreement from both parties
  • Court order
  • Mediation or arbitration decision (if required by contract)
Disputed funds remain in escrow until resolved. The contract typically specifies dispute resolution procedures. Common dispute scenarios:
  • Buyer claims valid contingency; seller disagrees
  • Disagreement about whether deadlines were met
  • Disputes over inspection negotiation outcomes
  • Questions about good faith effort on financing

​
Protecting Earnest Money

Before signing a contract:
  • Understand all contingencies and their deadlines
  • Know what protections exist and what has been waived
  • Confirm earnest money amount and due date
  • Verify the title company’s escrow procedures
Verify wire instructions: Earnest money is a prime target for wire fraud. Always verify wire instructions by phone using a number from the title company’s website or contract documents, never from an email. Document everything: Keep copies of all contract documents, addendums, and communications. Documentation matters if disputes arise. Meet deadlines: Contingency protections expire. Missing inspection or financing deadlines may forfeit protections even if valid issues exist.

​
Questions to Ask

“When is earnest money due and how do I submit it?” Clarifies deadline and acceptable payment methods (wire, certified check, etc.). “How is earnest money held and protected?” Confirms escrow procedures and insurance coverage. “What happens to earnest money if the transaction doesn’t close?” Understand the release process and potential dispute procedures. “How do you communicate wire instructions?” Verify the company uses secure methods, not email-only communication.

Next: Wire Fraud Protection

Security protocols for protecting fund transfers

Compare Title Companies

Research title companies with verified reviews