Earnest Money
A deposit paid by the buyer to demonstrate serious intent — held in escrow until closing.
Definition
Earnest money (also called a good faith deposit or EMD) is a deposit paid by a buyer when submitting an offer or signing a purchase contract. It signals serious intent to purchase and is held in escrow by a third party (title company, attorney, or escrow company) until closing.
Earnest money is typically 1–3% of the purchase price in residential deals, though amounts vary widely by market and investor type. Cash investors making offers at steep discounts may offer more earnest money to reassure sellers. Wholesalers often put in as little as $500–$1,000.
If the buyer defaults (backs out without a valid contractual reason), the seller typically keeps the earnest money as liquidated damages. If the seller defaults, the buyer is usually entitled to the return of their earnest money and may also seek additional damages. Understanding what allows you to exit the contract and reclaim your deposit is a critical part of reading any purchase agreement.
Related Terms
Purchase Agreement
The legal contract between buyer and seller that outlines the terms of a real estate transaction.
Due Diligence
The investigation and verification process buyers conduct before committing to a real estate purchase.
Escrow
A neutral third-party account that holds funds and documents during a real estate transaction.
Closing Costs
Fees and expenses paid at settlement when a real estate transaction is finalized.