Earnest Money
What is Earnest Money?
Earnest Money (also known as a “Good Faith Deposit” or “Earnest Money Deposit”) is a deposit given by the buyer to the seller after the buyer’s offer has been accepted to show the seller that the buyer intends to complete the purchase of the home. The Earnest Money converts to the buyer’s down payment or closing costs when the purchase is completed. The Earnest Money is typically 1-3% of the purchase price—depending on the market conditions—and should be deposited by the buyer into the escrow account held by the escrow agent.
Why does Earnest Money matter?
When the buyer and seller sign the Purchase and Sale Agreement (PSA), the seller delists the property from the market. If the buyer then cancels the deal without invoking a contingency, the seller keeps the Earnest Money to recoup any financial losses from delisting the property—such as missing out on other offers or re-listing costs. In most cases, this deposit incentivizes the buyer to continue with the transaction.
What can cause the buyer to lose the Earnest Money?
A buyer can lose the Earnest Money if they:
- Forfeit the deposit in order to purchase another home
- Cancel the deal without invoking a contingency outlined in the PS
- Do not meet the due dates established in the PSA for the buyer’s responsibilities, such as securing financing or having an inspection completed
- Waive their contingencies in the PSA but run into problems during the closing process (e.g., inability to secure financing due to a low appraisal)
- Give the earnest money directly to the seller, rather than deposit it into an escrow account
