What earnest money is and how the deposit is sized
When a seller accepts your offer, earnest money is the deposit that turns a promise into a commitment. It tells the seller you intend to follow through, which is why they are willing to stop showing the home and take it off the market while the sale works toward closing. The amount is usually set as a percentage of the purchase price — commonly 1 to 3 percent, and higher in hot markets where buyers compete — so the deposit is simply the price multiplied by that percent. A bigger deposit signals a more serious buyer and can strengthen your bid when several offers are on the table.
The earnest money formula
Deposit = Purchase price × Earnest money percent
where the percent typically falls between 1 and 3 percent in a normal market and climbs higher when competition is fierce. The deposit is not an added expense — it is held in escrow and applied to your down payment or closing costs later, so it is part of the money you would pay anyway.
Worked example
Suppose a seller accepts your $400,000 offer and you put down a 2% good-faith deposit:
| Step | Amount |
|---|---|
| Purchase price | $400,000 |
| × Earnest money percentsquarely within the typical 1–3% range | 2% |
| = Earnest money depositheld in escrow, then credited toward your down payment or closing costs at closing | $8,000 |
Computed with this calculator's default settings — open the tool above and you'll see the same numbers, then adjust the price and percent to match your offer.
Where the money goes, and when it is at risk
Your deposit does not go to the seller. It is held in escrow by a neutral third party — a title company or broker — until closing, at which point it is credited toward your down payment or closing costs. In that sense it is not an extra cost at all; it is part of the cash you would bring to the table regardless, just paid a little early. Whether you keep that money if a deal falls apart depends on the contingencies in your contract. Financing, inspection, and appraisal contingencies generally let a buyer walk away and recover the deposit when a loan is denied, an inspection turns up serious problems, or the appraisal comes in low. Back out for a reason no contingency covers, however, and you can forfeit the deposit to the seller.
- It is part of your buying budget, not an add-on. Plan the deposit alongside everything else you owe at the table — ourclosing cost calculatorshows how the credited deposit fits into the cash you bring on closing day.
- Size it against what you can afford. A larger deposit strengthens an offer, but only commit what fits your overall purchase — check your range with thehome affordability calculator.
- Contingencies decide whether it returns. The financing, inspection, and appraisal protections you negotiate are what stand between a refundable deposit and a forfeited one.
Frequently asked questions
What is earnest money?
Earnest money is a good-faith deposit a buyer submits when a seller accepts their offer. It signals that the buyer is serious about following through on the purchase, giving the seller confidence to take the home off the market while the deal moves toward closing. The money sits in a neutral escrow account rather than going straight to the seller, and it is later applied toward the buyer’s costs at closing.
How much earnest money is typical?
A typical earnest money deposit runs about 1 to 3 percent of the purchase price, though the figure rises in competitive markets where buyers compete to stand out. On a 400,000 dollar home that is roughly 4,000 to 12,000 dollars. The right amount depends on local custom and how strong you want your offer to look — a larger deposit signals more commitment, while the percentage itself is what the calculator multiplies against the price.
Is earnest money refundable?
It can be, and that hinges on the contingencies written into your contract. Financing, inspection, and appraisal contingencies generally let a buyer cancel and recover the full deposit if the loan falls through, the inspection reveals serious problems, or the appraisal comes in low. Without a qualifying contingency, walking away usually means the seller is entitled to keep the money, so the protections you negotiate up front determine whether it comes back.
Where does earnest money go, and is it part of the down payment?
The deposit is held in escrow by a neutral third party such as a title company or broker, not paid directly to the seller. At closing it is credited toward what you already owe — your down payment or closing costs — so it is not an extra fee. Think of it as paying part of your purchase money early; the deposit reduces the cash you need to bring on closing day rather than adding to your total cost.
Can I lose my earnest money?
Yes, if you back out of a signed contract for a reason that no contingency covers. If you simply change your mind, miss agreed deadlines, or fail to perform your obligations, the seller can typically claim the deposit as compensation for taking the home off the market. As long as you cancel within the bounds of a valid contingency and on time, the money is generally protected and returned to you.
Disclaimer: This calculator is foreducation and illustration only. Earnest money customs, typical percentages, and the contingency protections that govern refunds vary by state, market, and contract, and the figures here are estimates rather than terms of any actual transaction. Nothing here is legal, financial, or real estate advice — consult your agent and attorney for your specific deal.