Earnest Money

In depth

Earnest money is the good-faith deposit a buyer makes when offering to purchase real estate. Held by a neutral escrow agent or title company, it is applied to the down payment and closing costs at closing, refunded if a contingency fails, or forfeited if the buyer defaults. Misconception: earnest money is not the same as a down payment; it precedes closing and is at risk based on contingency outcomes. Practically, in FSBO and owner-finance transactions, earnest money should never be paid directly to the seller because of refund risk. Always use a licensed escrow agent or title company. Typical amounts range from 1 to 3 percent of purchase price, with stronger markets demanding more. The contract should clearly state forfeiture conditions and timing of refund triggers.