What Is Earnest Money?

The first time a client wires earnest money, I usually hear from them about an hour later. They’ve just sent five figures to a company they’d never heard of three weeks ago, for a house they don’t own, and it stops feeling like a milestone and starts feeling like a leap of faith.

It isn’t one. But nobody walks you through this part, so here’s where that money goes, when you’re entitled to have it returned, and the short list of things that could genuinely cost you.

What it actually is

Earnest money is a deposit you make once a seller accepts your offer. It’s the part of your offer that isn’t words.

Anyone can write an offer. Writing one costs you nothing, and a seller who takes their house off the market for you is giving up thirty or forty days of other buyers to do it. Earnest money is what makes that trade fair: if you walk away for a reason your contract doesn’t cover, the seller keeps the deposit. That risk is the entire point, and it’s why an offer with a serious deposit reads differently than one without.

How much you’ll be asked for

Nationally it runs 1% to 3% of the purchase price. On a $600,000 home, that’s $6,000 to $18,000.

Here in California, the standard purchase agreement asks for an initial deposit up front, and 3% is the figure that comes up most, partly custom and partly because 3% is also the ceiling on what a seller is presumed entitled to keep if you default. In a competitive Los Angeles neighborhood with six offers on a Sunday, 3% is often the floor rather than the ask. In a slower market, or on a home that’s been listed a while, 1% is frequently plenty. Some contracts use a flat figure instead; $1,000 or $2,000 is common on lower-priced homes.

Here’s the useful thing about that number. Raising it strengthens your offer without raising your price. You aren’t paying more for the house. You’re putting more behind your promise to close, which is exactly what a seller choosing between similar offers is trying to measure.

It isn’t an extra cost

This is the part that relieves people most. Earnest money isn’t a fee. At closing it’s credited straight back to you and applied to your down payment and closing costs. You’ll see it as a line item on your Closing Disclosure, and the funds you bring to signing are smaller by that exact amount.

Your total is the same either way. The deposit simply leaves your account weeks ahead of everything else, and that timing matters. A $15,000 deposit three weeks after acceptance is real cash gone while you’re also paying for an inspection and an appraisal. When we talk about what you need liquid, this is part of it.

Where the money actually sits

Not with the seller. That’s the misunderstanding I correct most.

Your deposit goes to a neutral third party: an escrow company here in California, a title company or the listing brokerage’s trust account elsewhere. They hold it. They can’t release it to anyone without instructions signed by both sides, and escrow companies are licensed and regulated precisely because they hold other people’s money.

In California, the deposit is typically due within three business days of acceptance, usually by wire.

One caution, because this is the first wire most buyers ever send. Before you move a dollar, call the escrow company at a number you looked up yourself, off their website, and read the account details back to them out loud. Wire instructions arriving by email get spoofed, and that money doesn’t come back. Two minutes on the phone is the whole defense.

Getting it back

Almost always, and the mechanism is your contingencies: the conditions in your contract that let you cancel and take your deposit with you.

The common ones are financing, if your loan doesn’t come through; appraisal, if the home appraises below the price; inspection, if the property turns out to have problems you and the seller can’t resolve; and title, if the search reveals something wrong with ownership.

Each one protects you only while it’s still active. California’s standard agreement gives you 17 days after acceptance to investigate and either remove those contingencies or speak up, and that clock is short. Cancel properly inside your window and the deposit is returned to you.

The practical friction is that escrow needs cancellation instructions signed by both parties before releasing funds. A cooperative seller signs the same week. A frustrated one can drag it out, which is why a clean, timely, well-documented cancellation matters more than being technically right.

When you actually lose it

Three ways, and none of them are mysterious.

The first is waiving a contingency you later needed. In bidding wars, buyers routinely waive the appraisal or inspection contingency to win the house. That’s sometimes the right call, as long as you understand what you’ve done: traded away your protection on one specific risk in exchange for a stronger offer.

The second is missing a deadline, and this is the quiet one. Contingencies expire on a fixed calendar date, whether or not you’ve finished reviewing anything. Day 18 with no removal and no written extension can be treated as removal, and buyers lose deposits over a slow week of paperwork far more often than over anything dramatic.

The third is changing your mind. Cold feet isn’t a contingency, and neither is a better house appearing down the street.

I’ll add a fourth, because I watch it happen. Financing a car or opening a credit card mid-escrow can sink your loan approval. While your financing contingency is alive, you’re protected. After you’ve removed it, that same mistake turns into a lost deposit. Buy nothing until you have keys.

If a dispute does come up, the contract you signed already spells out how the deposit gets settled, and the liquidated damages clause you initialed limits what a seller can keep. That’s the point to bring in a real estate attorney rather than sort it out over text.

The bottom line

Earnest money proves you’re serious, sits with a neutral third party, and lands back in your column at closing as part of your down payment. You’ll have it refunded if you cancel for a reason your contract covers, inside the window your contract gives you. Keep your contingencies until you’re genuinely comfortable, watch your dates, and don’t take on new debt while you’re in escrow. Handled that way, the deposit is money you’re parking for a few weeks on its way into your own home.

Ready to learn more?

If you’re getting close to writing an offer and want to talk through what deposit makes sense for your situation and your market, I’d be honored to walk through it with you before you sign anything.