Earnest money: how much, who holds it, and when it is refundable

When a buyer’s offer is accepted, the first real money to change hands is the earnest money deposit. For a for-sale-by-owner seller it is one of the most reassuring parts of the process and one of the most misunderstood. It tells you the buyer is serious, but it is not yours to hold, not yours to spend, and not automatically yours to keep if the deal falls through. This guide walks through what earnest money is, how much is normal, who is allowed to hold it, how it is credited at closing, and the part everyone actually wants to know: exactly when the buyer gets it back and when they lose it.

This is general information, not legal advice. Earnest money rules are set by your contract and by state law, so confirm the specifics with a real estate attorney or your settlement agent.

What earnest money is, and what it is for

Earnest money is a good-faith deposit a buyer pays after an offer is accepted to show they intend to follow through and close. The Consumer Financial Protection Bureau describes it plainly as “a deposit a buyer pays to show good faith on a signed contract agreement to buy a home.”

Its purpose is to give the contract teeth. A purchase contract costs a buyer nothing to sign, so the deposit is the buyer putting real money at risk. If they walk away for no good reason, that money is on the line. For you as the seller, the deposit is partial compensation for taking your home off the market and turning away other buyers while the deal works through inspections, appraisal, and financing.

Two things it is not:

It is not the purchase price or a fee to you. The deposit is the buyer’s own money, parked with a neutral party until closing.
It is not a down payment, exactly. It becomes part of the down payment at closing, but in the meantime it is a separate good-faith deposit. The CFPB also uses “escrow account” to mean something different again, the lender’s account for taxes and insurance. Do not confuse the two.

How much is normal: the 1 to 3 percent rule

There is no fixed legal amount. The National Association of Realtors puts the full range at 1% to 10% of the purchase price, but in practice most ordinary sales land in the 1% to 3% band. On a 400,000 dollar home that is roughly 4,000 to 12,000 dollars.

A few patterns are worth knowing:

Hotter, more competitive markets push the number up. Where buyers are bidding against each other, deposits of 3% to 10% are used to make an offer stand out. A bigger deposit signals a more committed buyer.
Some regions use a flat dollar amount instead of a percentage, such as 5,000 or 10,000 dollars regardless of price. NAR notes that fixed amounts are becoming more common in some areas.
A bigger deposit is a stronger offer, not just a bigger number. When you weigh competing offers, the size of the earnest money is one honest signal of how serious and well-funded a buyer is. We cover reading the whole offer, not just the price, in offers and negotiation. When a live offer is in front of you, evaluate the whole offer, deposit included before you respond.

As a seller you can state an expected deposit when you market the home, but the final figure is negotiated like everything else in the offer. Buyers writing their own offers can see how it fits in make an offer without an agent.

Who holds the earnest money (and who must never hold it)

This is the single most important thing to get right. The earnest money must be held by a neutral third party, never by you, the seller, directly. Handing the buyer’s deposit straight to the seller defeats its purpose and exposes both sides to fraud and disputes.

Depending on your state and your contract, the holder is one of:

An escrow or title company, the most common arrangement in much of the country.
A settlement agent who manages the closing.
A real estate attorney’s trust account. In “attorney states,” especially in the Northeast and Southeast, a lawyer commonly holds the funds. If you are deciding whether you need one, see do I need a lawyer to sell my house.
A real estate broker’s dedicated trust account. Some states require a licensed broker to hold the deposit in a separate, regulated trust account.

NAR describes the holder as “a representative agreed to by the buyer or seller, whether that’s an attorney, real estate agent, agent of a title company or another third party,” and stresses that the contract should name who holds the money. These trust and escrow accounts are regulated precisely so the funds are kept separate from anyone’s operating money and cannot be touched until the deal resolves.

Two practical cautions for a FSBO seller:

Name the holder in the contract and confirm it before any money moves. Vague language here is where disputes start.
Watch for wire fraud. Criminals impersonate title and escrow companies to redirect deposits. Buyers should confirm wiring instructions by calling a known, verified phone number, never one from an email, before sending funds.

How it gets credited at closing

If the sale closes, the earnest money does not disappear and it is not a bonus to you. It is credited to the buyer at closing and applied toward their down payment and closing costs. In NAR’s words, once you close the deposit “will often be applied toward your down payment and other closing costs.”

So the mechanics are simple: the buyer already put, say, 8,000 dollars into escrow. At closing they owe the full agreed price. That 8,000 is counted as money already paid, so they bring 8,000 less in new cash. You still receive the full agreed sale price; the deposit was simply an early installment of the buyer’s funds. To see where this sits among all the closing-day numbers, walk through closing and costs, and estimate your bottom line with our net proceeds calculator.

When the buyer gets it back, and when they forfeit it

This is the heart of it, and the answer is almost always determined by the contingencies and deadlines written into the purchase contract. A contingency is a condition that lets the buyer (or sometimes the seller) cancel without penalty if it is not met. If a buyer cancels under a contingency, properly and on time, the deposit is refunded. If they cancel for a reason no contingency covers, or blow a deadline, they usually forfeit it.

Here is the contingency-by-contingency picture for the most common situations.

Situation	What happens to the deposit	Why
Financing contingency, loan denied	Refunded to buyer	The buyer could not get the mortgage despite a good-faith effort, and the contract protected them for this.
Financing contingency, buyer simply did not apply or missed the loan deadline	Forfeited to seller	The protection only holds if the buyer acted in good faith and within the deadline.
Inspection contingency, major defects found and seller will not repair or adjust	Refunded to buyer	The buyer cancels within the inspection period for a reason the contingency covers.
Inspection contingency expired, then buyer backs out	Forfeited to seller	Once the inspection window closes without an objection, that protection is gone.
Appraisal contingency, home appraises below the contract price and parties do not renegotiate	Refunded to buyer	The appraisal gap means the lender will not fund the agreed price; the contingency lets the buyer walk.
Appraisal contingency waived, then buyer cannot cover the gap	Forfeited to seller	By waiving it, the buyer accepted the risk.
Sale-of-home contingency, buyer’s current home does not sell in time	Refunded to buyer	If the contract made the purchase contingent on selling their existing home, this is covered.
Seller cancels or breaches the contract	Refunded to buyer	The buyer did nothing wrong; their money comes back.
Buyer changes their mind with no applicable contingency	Forfeited to seller	Pure buyer’s remorse outside any protection is the classic forfeiture case.
Buyer misses a hard contractual deadline with no agreed extension	Forfeited to seller	NAR specifically lists missing key deadlines without a valid extension as a forfeiture trigger.
Buyer designated the deposit non-refundable after a certain date, then walks	Forfeited to seller	The parties agreed to this in writing up front.

A few principles tie the table together:

Contingencies plus deadlines decide everything. A protected reason claimed late can still cost the buyer the deposit. A weak reason claimed inside an open contingency window is usually fine.
Good faith matters. A financing contingency protects a buyer who genuinely tried and was denied, not one who never applied.
Waiving contingencies shifts the risk to the buyer. Buyers often waive inspection or appraisal contingencies to win a bidding war, which makes their deposit much harder to recover if something goes wrong. That is good for you as a seller but worth understanding on both sides.

Releasing the money is not automatic

Even when you believe a buyer has clearly forfeited the deposit, you generally cannot just have the holder hand it to you. The escrow agent, title company, attorney, or broker holding the funds is neutral and will not release them to either party on one side’s say-so. In almost all cases they need a signed mutual release from both buyer and seller, or a court order.

If you and the buyer disagree about who is entitled to the money, it stays put. The path to resolving it, mediation, arbitration, or small claims court, is usually spelled out in the contract. This is exactly why the deposit amount, the contingencies, and the deadlines should be written clearly before anyone signs, and why some sellers choose to have an attorney review the contract. The relevant paperwork and disclosures are covered in seller disclosures and documents.

A short checklist for FSBO sellers

Decide the deposit you expect (often 1% to 3%) and treat a larger one as a sign of a more committed buyer.
Name a neutral holder in the contract (escrow, title, attorney, or broker trust account) and never take the money yourself.
Read the contingencies and deadlines carefully, because they decide who keeps the deposit if the deal collapses.
Confirm escrow wiring instructions by phone to a verified number to guard against wire fraud.
Expect the deposit to be credited to the buyer at closing, not added on top of your sale price.
If a dispute arises, do not expect an automatic payout; plan for a signed release or a legal process.

Earnest money is a powerful signal and a real protection, but only if the contract around it is clear. Get the amount, the holder, the contingencies, and the deadlines right, and the deposit does its job quietly in the background while the rest of the sale moves forward.

Sources used on this page

Every legal, tax, and process claim on this page traces to one of these. We re-check them on a schedule and date the page when anything changes.

Consumer Guide: Escrow and Earnest Money (definition, who holds it, credited at closing, refund vs forfeit)National Association of Realtors · nar.realtor
Earnest Money in Real Estate: Refunds, Returns and Regulations (1% to 10% range, flat amounts, contingency outcomes, deadlines)National Association of Realtors · nar.realtor
Mortgages key terms (earnest money as a good-faith deposit; escrow account definition)Consumer Financial Protection Bureau · consumerfinance.gov

Common questions

How much earnest money is normal?

Most deposits land between 1% and 3% of the purchase price, though the National Association of Realtors notes the broader range runs from 1% to 10% in hot markets. In some regions a flat amount, such as 5,000 or 10,000 dollars, is used instead of a percentage. A larger deposit makes an offer look stronger, so in a competitive situation buyers sometimes offer more to stand out.

Who holds the earnest money?

A neutral third party, not you. Depending on the state and the contract, that is an escrow or title company, a settlement agent, or an attorney's trust account. In some states a real estate broker holds it in a dedicated trust account. The money should never be handed directly to the seller, and the contract names who holds it.

Is earnest money refundable?

It depends on why the deal falls apart. If the buyer backs out for a reason protected by a contingency in the contract, such as failed financing, a bad inspection the seller will not address, or a low appraisal, and they do it within the deadline, the deposit is normally refunded. If the buyer simply changes their mind, misses a deadline, or breaches the contract with no contingency to rely on, the seller can usually keep it.

Does the seller ever actually keep the earnest money?

Yes, but less often than sellers expect. The seller keeps it when a buyer defaults outside of any contingency, for example by walking away after all contingencies are removed or by missing a hard deadline without an extension. Even then the holder will not release the funds until both parties sign a release or a dispute is resolved, so it is not automatic.

What happens to the deposit at closing?

It is credited to the buyer. The earnest money is applied toward the buyer's down payment and closing costs, so it reduces the cash they bring to the table. It is not extra money to the seller; the full agreed price still flows through at closing. Earnest money is not the same as a down payment, it is just an early piece of it.

What if the buyer and I disagree over who gets the deposit?

The party holding the funds cannot just pick a side. They typically need a signed mutual release from both buyer and seller, or a court order, before paying anyone. If you cannot agree, the money sits in escrow until the dispute is resolved through mediation, arbitration, or small claims court, depending on what the contract specifies. This is one reason the contract language and deadlines matter so much.

Can earnest money be made non-refundable?

Sometimes. Buyers competing for a home occasionally offer earnest money that is non-refundable after a certain date, or that goes "hard" once inspection clears. That is a contract term the two sides agree to in writing, not a default. As a seller it strengthens your position, but pushing for it can also scare off buyers, so it is a negotiation point rather than a rule.