Understanding Earnest Money and How to Protect It

In the complex world of real estate, earnest money — also known as a “good-faith deposit” — is a key player. It’s submitted by the buyer shortly after an accepted offer and typically ranges from 1% to 3% of the home’s purchase price, though in hot markets, it may climb as high as 5% or more (rescorealty.com, zillow.com, sellingmorerealestate.com).

Upon submission, earnest money is held — in a secure escrow account — by a neutral third party such as a title company, attorney, or real estate brokerage (en.wikipedia.org). This ensures neither the buyer nor seller can unlawfully access the funds before closing, offering protection on both sides.

Why Earnest Money Matters

• For buyers, it shows commitment and strengthens their offer.
• For sellers, it minimizes the risk of wasted time if the deal falls through (nar.realtor, pnc.com).

At closing, the earnest money is credited toward the purchase—applied to down payment or closing costs (investopedia.com).

Protecting Your Earnest Money

A well-structured contract is your best defense. Make sure it includes contingency clauses — like home inspection, financing, or appraisal — that allow you to back out and retain your deposit if something goes wrong (investopedia.com).

Beyond contingencies, follow these best practices:

1. Deposit via a trusted escrow agent, not directly to the seller (investopedia.com).
2. Never waive contingencies lightly. Though it may make your offer more appealing, it risks forfeiting your deposit if issues emerge (wsj.com).
3. Meet all deadlines — such as inspection or financing timelines—to avoid defaulting on the agreement (bankrate.com).
4. Use the earnest money as part of your down payment or closing costs, so it works toward your purchase (wsj.com).
5. Work with real estate professionals, like agents or attorneys, to help draft contracts and manage funds securely (rescorealty.com).

For deeper insights, check out this comprehensive guide from the National Association of REALTORS® that breaks down refund scenarios, industry best practices, and how agents help safeguard these deposits.

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