If you’ve found a home you love and are ready to make an offer, your real estate agent will likely mention earnest money early in the homebuying process. For many homebuyers, this raises questions. What is earnest money, how does it work, and how much should you actually put down?

Earnest money is not an extra fee or a surprise cost. It is a good faith deposit that shows a seller you are serious about moving forward with a home purchase. Understanding how earnest money works can help you make stronger offers, protect your money, and navigate the process with more confidence, especially in competitive markets like the greater Seattle area.

What is earnest money in real estate?

Earnest money is a sum of money a buyer submits shortly after an offer is accepted to demonstrate serious intent to complete a home purchase. It is sometimes called an earnest money deposit or good faith deposit.

Rather than going directly to the seller, the earnest money deposit is held in an escrow account by a neutral third party, typically a title company or escrow firm. If the transaction closes, that money is credited toward your down payment or closing costs. In other words, earnest money is applied upfront and reduces what you owe at closing.

If the deal does not close, whether you receive your earnest money back depends on the terms of the purchase contract and which contingencies are still in place. This is why working with an experienced real estate agent who understands local contracts and norms is critical. Missteps here can be costly.

Why does earnest money exist?

Earnest money plays a key role in real estate transactions by protecting both buyers and sellers.

Demonstrating serious intent

In a competitive market, sellers often review multiple offers. A meaningful earnest deposit signals that a buyer is financially prepared and serious about the purchase price, not just testing the waters. This can be especially important when competing against cash offers or buyers with fewer contingencies. If you are navigating this type of situation, it helps to understand how buyers compete with cash offers in Seattle and similar markets.

Protecting sellers from withdrawn offers

Once a seller accepts an offer, they typically stop marketing the property. If a buyer walks away without cause, the seller loses time and opportunity. Earnest money helps offset that risk and keeps the transaction grounded in mutual commitment.

Encouraging buyers to follow through

Because earnest money is paid upfront, it motivates buyers to meet deadlines, complete inspections, and finalize financing. It helps keep the transaction moving forward once the purchase agreement is signed and reduces unnecessary delays.

How much earnest money do you need?

The amount of earnest money varies based on market conditions, home price, and local norms. In most cases, earnest money ranges from 1% to 3% of the sale price.

In a competitive real estate market, buyers may offer more earnest money to strengthen their offer and demonstrate financial readiness. In a slower market, sellers may accept a smaller earnest deposit if other terms are favorable.

It is also important to balance strength with risk. Offering more earnest money can make an offer more attractive, but it increases the amount of money at stake if contingencies are waived or deadlines are missed.

A knowledgeable real estate agent can help determine an appropriate amount by reviewing comparable sales, seller expectations, and current buyer demand. Buyers who want a deeper understanding of market conditions often benefit from reviewing local context, such as Seattle real estate market trends before submitting offers.

Who holds the earnest money?

Earnest money is always held by a neutral third party, never by the seller or the buyer. This structure is designed to protect everyone involved in the transaction and ensure the funds are handled fairly.

Understanding your escrow account and title company

The earnest money deposit is placed into a secure escrow account managed by a title company, attorney, or licensed escrow provider. This neutral party is responsible for holding the funds while the transaction moves forward and for releasing them only under the terms outlined in the purchase contract.

Because the escrow holder does not represent either side, they act as an impartial administrator. They follow written instructions in the contract and ensure the earnest money is credited toward the buyer’s down payment or closing costs at closing, or returned to the buyer if the contract is terminated under a valid contingency.

Using an escrow account also prevents misuse or misdirection of funds. The money is kept separate from operating accounts and cannot be accessed without proper authorization. This layer of protection is especially important in higher-priced home purchases, where earnest money deposits can represent a significant upfront investment.

When do you pay earnest money?

Earnest money is typically paid shortly after the seller formally accepts your offer. In most real estate transactions, the purchase contract sets a deadline of one to three business days from mutual acceptance for the earnest money deposit to be delivered.

Payment is usually made by check or wire transfer directly to the escrow account managed by the title company or escrow provider. Your real estate agent will walk you through the process, confirm where the funds should be sent, and help ensure the payment is made on time and correctly.

Once deposited, the earnest money remains in escrow throughout the transaction. It stays there until closing, when it is applied toward your down payment or closing costs, or until the transaction ends under the terms of the purchase contract if a valid contingency is exercised.

Buyers preparing for this stage often benefit from understanding how earnest money fits into the larger timeline. Reviewing a broader Seattle home buyer’s guide can help clarify what to expect from offer acceptance through closing.

What happens if the deal falls through?

Whether earnest money is refundable depends on why the deal ends and which common contingencies are still active.

When you may get earnest money back

Earnest money is often refundable if the buyer exits the contract under a valid contingency, such as:

• Home inspection contingency following an unfavorable home inspection
• Financing contingency if a lender denies the home loan
• Appraisal contingency if the home appraisal comes in below the purchase price
• Home sale contingency if the buyer cannot sell their existing home
  
  

In these cases, buyers typically receive their earnest money back.

When earnest money may be forfeited

Buyers may lose their earnest deposit if they walk away after contingencies are removed, miss deadlines without written extensions, or breach the purchase contract. This is where careful guidance matters. Many issues stem from misunderstandings around contingencies, including what contingent means in real estate and how they are removed.

How buyers can protect their earnest money

To reduce risk and protect their earnest money, buyers should:

• Work with an experienced local real estate agent who understands contract timelines, contingencies, and market norms
• Keep inspection, financing, and appraisal contingencies in place unless there is a clear strategic reason to waive them
• Maintain strong preapproval and credit readiness to avoid financing delays
• Meet all contractual deadlines and document any extensions in writing
  
  

Clear documentation and proactive communication are critical. This is where working with a knowledgeable team like Every Door Real Estate can make a meaningful difference. EDRE agents help buyers structure competitive offers, manage deadlines, and navigate contingencies so earnest money stays protected throughout the transaction. If you’re preparing to make an offer, you can contact Every Door Real Estate to get local guidance before submitting.

What happens to earnest money at closing?

At closing, your earnest money is credited toward your final costs on the settlement statement. In most cases, it is applied directly to your down payment, reducing the amount of cash you need to bring to the closing table. Depending on how the transaction is structured, it may also be used to offset a portion of your closing costs.

Because earnest money was paid upfront and held securely in escrow, it seamlessly rolls into the final accounting. You do not receive it back as a separate payment, nor do you pay it twice. Instead, it functions as an early contribution toward your total purchase, helping lower your remaining balance due at closing.

That said, earnest money is only one part of the overall financial picture. Buyers should still plan ahead for other expenses associated with buying a home, including taxes, lender fees, and escrow charges. Reviewing Washington State closing costs in advance can help you understand what to expect and avoid last-minute surprises.

Earnest money FAQs

Is earnest money required?

Not always, but most sellers expect it as part of a serious offer.

Does earnest money affect interest rate or loan terms?

No. Your interest rate is based on your lender, credit score, and market conditions.

Is earnest money refundable?

Yes, in many cases, as long as the buyer exits under valid contingencies.

Key takeaways for homebuyers

• Earnest money is a good faith deposit that shows commitment
• It is held safely in an escrow account
• The amount depends on the real estate market and purchase price
• Contingencies protect buyers if issues arise
• Earnest money is applied toward closing, not an extra cost
  
  

Understanding how earnest money works helps buyers move through the homebuying process with confidence, especially when making offers in competitive markets. Working with a local, experienced real estate agent like the team at Every Door Real Estate can help ensure each step, from earnest money to closing, is handled correctly and strategically.