An earnest money deposit in real estate is the upfront cash a buyer puts into escrow shortly after a seller accepts their offer, usually 1% to 3% of the purchase price.1Freddie Mac. What Is Earnest Money and How Does It Work? – Section: How much is earnest money? It shows the seller you’re serious enough to take the house off the market during inspections, appraisal, and financing. If the deal closes, the money is credited to you. If you walk away for a reason your contract allows, you get it back. If you walk away without one, the seller usually keeps it.
How Much to Put Down
On a $500,000 home, a 1% to 3% deposit means roughly $5,000 to $15,000 changing hands within days of signing. The amount is negotiable and moves with the market. In a hot market with multiple offers, buyers routinely go higher to stand out. In a cooler market, the low end of the range is usually fine.
New construction works differently. Builders often set a fixed deposit rather than negotiating a percentage, and 5% or more is common on custom or high-end builds. Many of the contingencies that protect resale buyers either don’t apply or are written differently in builder contracts because the home hasn’t been built yet. Read the builder’s purchase agreement carefully before assuming you have the same exit ramps as a resale deal.
Commercial and luxury transactions follow their own norms, with deposits of 5% to 10% or fixed sums in the tens of thousands. The underlying principle is constant: the deposit has to be large enough that walking away costs something real.
How to Pay It and Where It Goes
Most contracts accept wire transfer, cashier’s check, or certified check. Some allow personal checks, but sellers and escrow agents often prefer guaranteed funds because a personal check can bounce and put you in breach before you know it. For larger deposits, a wire is the usual method because it clears quickly and leaves an electronic paper trail.
Whichever method you use, the money does not go to the seller. It goes to a neutral third party, typically a title company, an escrow company, or the real estate brokerage’s trust account. The funds sit there until closing or until the contract falls apart, at which point the escrow holder distributes them according to the contract or a signed release from both sides.
Contracts generally give you a short window to deliver the deposit, often around three business days after signing. Miss that deadline and you can be in breach. Before you send anything, confirm the exact name of the escrow holder, get wire instructions directly from your escrow officer by phone, and include the property address and your full legal name with the transfer so the funds can be matched to your file. Your bank will usually charge $25 to $35 for an outgoing domestic wire. Save the confirmation receipt and expect the escrow agent to send an acknowledgment of receipt once the funds hit the account.
Protect the Wire From Fraud
Wire fraud targeting real estate closings is one of the fastest-growing financial crimes in the country. The FBI reported more than $275 million in online real estate fraud losses in a single recent year. The scheme is simple: a scammer intercepts or spoofs an email from your title company, agent, or attorney and sends altered wire instructions that route your deposit to a fraudulent account. Once a wire lands in the wrong account, recovery is difficult and often impossible.
The defense is discipline. Never wire money based on instructions received by email alone, even from a familiar address. Before you send anything, call your escrow officer at a phone number you found independently and verbally confirm the routing number, account number, and the name on the account. A last-minute change to previously confirmed instructions is a red flag. Verify by phone again before acting.
If you suspect you’ve sent money to a fraudulent account, call your bank immediately to request a wire recall. Speed matters because banks can sometimes freeze the receiving account before the funds are withdrawn. Also file a report with the FBI’s Internet Crime Complaint Center (IC3).
When You Get Your Deposit Back
Purchase contracts build in contingency clauses, which are defined exit points that let you cancel and recover your full deposit. The most common ones are:
- Inspection contingency, which lets you have the property professionally inspected and cancel or renegotiate if serious problems turn up. Inspection periods often run 7 to 14 days.
- Appraisal contingency, which protects you if the home appraises for less than the contract price and the seller won’t lower the price or you can’t cover the gap.
- Financing contingency, which lets you walk away with your deposit if your mortgage is denied despite a good-faith effort to get approved.
- Home sale contingency, which gives you time to sell your current home before committing to the new one.
Each contingency has its own deadline in the contract. To cancel under a contingency, you generally have to notify the seller in writing before that deadline expires. Once a contingency period passes without you exercising it, that protection is gone and you’re one step closer to being fully committed.
When You Lose It
If every contingency period has run out and you back out anyway, whether from cold feet or a change in your finances, the seller can claim your deposit as liquidated damages for breach of contract. That’s the whole point of the deposit from the seller’s side. It compensates them for time off the market and offers they turned down.
Forfeiture isn’t automatic. The escrow holder can’t hand the money to the seller just because the seller says you breached. Both parties typically have to sign a mutual release before the escrow company will release disputed funds. If you believe you had a legitimate reason to cancel, refusing to sign that release is your leverage, though it also means the money sits frozen until the dispute is resolved.
If Both Sides Claim the Money
When buyer and seller both demand the deposit and neither will move, the escrow holder is stuck in the middle with no authority to pick a side. Most contracts require mediation first, which is often the fastest and cheapest path to a resolution. If mediation fails, the escrow holder can hold the funds and wait, or file an interpleader action.
An interpleader is a lawsuit the escrow holder files to deposit the contested funds with the court and step out of the dispute. Federal law allows this whenever two or more parties claim the same money and the amount exceeds $500.2Office of the Law Revision Counsel. 28 USC 1335 Interpleader The money goes into the court’s registry and a judge eventually decides who gets it.
Disputes get expensive fast. The escrow holder is generally entitled to recover its attorney’s fees and court costs from the escrowed funds before the remainder goes to the court, and those fees commonly run $3,000 to $5,000 or more. Then each side needs its own attorney. It’s not unusual for a fight over a $10,000 deposit to generate legal costs that exceed the deposit itself. For smaller deposits, small claims court may be an option depending on local limits, which range from roughly $3,000 to $20,000. Before you dig in, do the math. A mediated split almost always leaves both parties better off than litigation.
How It’s Credited at Closing
If the deal closes, your earnest money doesn’t disappear into the transaction. It shows up as a credit on your settlement statement, reducing the cash you owe. It’s typically applied toward your down payment or closing costs like title insurance premiums, recording fees, and prepaid items. The Closing Disclosure your lender provides itemizes the credit in the summaries of transactions section.3Consumer Financial Protection Bureau. Regulation Z 1026.38 Content of Disclosures for Certain Mortgage Transactions If your deposit was $10,000 and your cash to close would otherwise be $45,000, the deposit brings that number down to $35,000. Review the Closing Disclosure before signing to confirm the full deposit amount appears. Catching a missing credit before the closing table is far easier than fixing it afterward.
Extra Protection for FHA and VA Buyers
Buyers using FHA or VA financing get an appraisal-based protection that conventional buyers don’t automatically receive. Both programs require the purchase contract to include an amendatory clause, sometimes called an escape clause, that shields earnest money if the home appraises below the purchase price.
For FHA loans, HUD’s Single Family Housing Policy Handbook requires contract language stating that the buyer is not obligated to complete the purchase or forfeit earnest money unless they’ve received a written appraisal showing the property’s value meets or exceeds the contract price. The actual dollar amount of the sales price must appear in the clause, and any price change requires a revised version.4U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook 4000.1 VA loans carry a similar protection under federal regulation. The contract must state that the buyer won’t face any penalty, including forfeiture of earnest money, if the purchase price exceeds the reasonable value established by the VA.5eCFR. 38 CFR Part 36 Loan Guaranty – Section 36.4303(k) The buyer can still choose to proceed, but can’t be forced to.
Conventional buyers can negotiate a similar clause, but it isn’t required by default. If you’re using conventional financing and worried about appraisal risk, write an appraisal contingency into your offer.
If You Forfeit, You Can’t Deduct It
Forfeited earnest money isn’t a tax write-off. The IRS explicitly lists forfeited deposits, down payments, and earnest money as nondeductible expenses for homeowners.6Internal Revenue Service. Publication 530 (2025) Tax Information for Homeowners You can’t claim the loss on your return, regardless of the deposit size or the reason the deal fell through. The money is simply gone.