What Is Earnest Money in Real Estate—and Can You Lose It?

“Wait...Where Does My Earnest Money Go?”

You finally get a property under contract.

Then someone says:

“Now you need to deposit the earnest money.”

If you're a new investor, you may immediately wonder:

Who gets the money?

Does the seller keep it?

Do I get it back?

And probably the biggest question:

Can I lose it?

The answer starts with understanding what earnest money actually is.

What Is Earnest Money?

Earnest money, sometimes called an earnest money deposit, is money a buyer provides in connection with a purchase agreement to demonstrate their commitment to the transaction.

The Consumer Financial Protection Bureau describes it as a good-faith deposit on a signed agreement to purchase a home.

But here's an important distinction:

Earnest money is not the same thing as a down payment.

A down payment is money a buyer contributes toward purchasing the property, often in connection with financing.

Earnest money is a deposit connected to the purchase contract.

Who Holds the Earnest Money?

This can vary by transaction and location.

Earnest money may be held by an appropriate third party or otherwise handled according to the purchase agreement and applicable law. The CFPB notes that earnest money may be held by a seller or a third party such as a real estate agent or title company.

Depending on where you're doing business, you may also encounter a:

Title company

Escrow agent

Closing attorney

Another authorized party.

This is another reason investors shouldn't simply ask:

“Where do wholesalers usually send earnest money?”

Ask:

“What does my contract require for this transaction?”

How Much Earnest Money Do You Need?

There is no universal earnest-money amount that applies to every real estate transaction.

The amount may be negotiated or determined according to the agreement and applicable requirements.

That means a new wholesaler shouldn't assume:

“Earnest money is always $10.”

or

“It has to be 1% of the purchase price.”

Neither should be treated as a universal rule.

Read the agreement.

Know the amount.

Know the deadline.

Know where it must be delivered.

What Happens to Earnest Money at Closing?

If the transaction successfully closes, the earnest money doesn't simply disappear.

It is generally accounted for as part of the transaction and may be credited toward amounts the buyer owes at closing. The CFPB notes that earnest money may be applied toward closing costs or a down payment when a home purchase closes.

For investors, the exact accounting will depend on the transaction.

That's why you should review your settlement or closing documents rather than treating the deposit as a separate mystery payment.

Can You Get Your Earnest Money Back?

Sometimes.

This is where the contract becomes extremely important.

Purchase agreements may contain contingencies or termination provisions that establish circumstances under which a buyer can terminate and potentially recover the deposit.

For example, some purchase contracts may include provisions related to:

Financing

Inspections or due diligence

Title

Other negotiated conditions.

The CFPB specifically advises buyers to understand financing and inspection contingencies because they can affect whether a buyer remains obligated to proceed with a purchase.

But don't assume a contingency exists.

And don't assume your earnest money is refundable simply because you changed your mind.

Can You Lose Your Earnest Money?

Yes, it may be possible.

If a buyer fails to perform according to the agreement and doesn't have a contractual or legal basis for terminating, the earnest money may be at risk.

The CFPB notes that earnest money may be forfeited when a buyer does not perform in good faith, while permissible termination under the contract may allow the deposit to be returned.

Exactly what happens depends on the contract, circumstances and applicable law.

So instead of asking:

“Is earnest money refundable?”

The better question is:

“Under what circumstances does my agreement say the earnest money may be returned or forfeited?”

That's a much better investor question.

What If You're Wholesaling the Property?

Wholesalers need to understand earnest money just like any other party entering into a purchase agreement.

If you're signing as the buyer, don't treat the contract as paperwork you're only using to find another investor.

You're entering into an agreement that can create real rights and real obligations.

That includes understanding:

How much earnest money is required

When it's due

Who holds it

What deadlines apply

What termination rights exist

What happens if the transaction doesn't close

Never sign a contract you don't understand.

Don't Confuse Earnest Money With an Escrow Account

You may hear escrow used when discussing where earnest money is held before closing.

You may also hear escrow account used for an account a mortgage servicer maintains to pay expenses such as property taxes and homeowners insurance.

Those are not necessarily the same thing.

Freddie Mac defines escrow broadly as the holding of money or documents by a neutral third party before closing, while also noting that the term can refer to a lender or servicer account used for taxes and insurance.

Understanding the context matters.

The IFN Approach

Don't Just Send the Deposit. Understand the Agreement.

Before sending earnest money, know:

How much you're depositing.

Where it's going.

When it's due.

What happens to it at closing.

Under what circumstances it may be returned.

Under what circumstances it may be at risk.

Because earnest money may be a relatively small part of a transaction—but the contract behind it isn't small at all.

Know what you're signing before you put money on the line.

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Educational Disclaimer

This article is provided for general educational and informational purposes only and does not constitute legal, financial, tax, brokerage or investment advice. Earnest-money requirements, escrow practices, contingencies, termination rights, remedies and contract requirements vary by transaction and jurisdiction. Review the applicable agreement and consult an appropriately qualified professional regarding your particular transaction.