What is an Earnest Money Deposit When Buying a Home?
Think of it as a security deposit for your future home. It shows the seller you’re a serious buyer, while giving both parties a level of protection as the sale moves forward. If either party backs out of the purchase agreement without a valid reason, the other may be entitled to the deposit.
In this guide, we’ll cover everything you need to know about earnest money deposits—from how much you can expect to pay and when it’s due, to what happens at the end of the transaction or if the deal falls through.
What is an Earnest Money Deposit?
Earnest money, sometimes called a “good faith deposit” or “initial deposit”, is money put down by the buyer to show the seller that they’re serious about purchasing the home. It demonstrates commitment to completing the transaction— assuming there are no major issues like a failed inspection or low appraisal.
The deposit is typically submitted alongside the purchase offer or shortly after the offer is accepted. It gives the seller confidence in the buyer’s intent and encourages them to take the home off the market while the sale moves forward.
If you’re buying a new construction home, the builder may have specific payment policies once certain milestones are reached, such as finalizing design selections.
Trevino Floor Plan, Cottage Collection, Kissing Tree Community, San Marcos, Texas
How Much is an Earnest Money Deposit?
The amount you’ll need for your earnest money deposit can vary based on location, market conditions, and the home price. Generally, you can expect to put down between 1% and 5% of the home sales price. For example, on a $400,000 resale home, the earnest money deposit might range from $4,000 to $20,000.
With a new home builder, the deposit amount may be set at a flat rate (e.g., $5,000 or $10,000) regardless of the home price, or it may be a fixed percentage based on the home’s base price plus any upgrades you select.
Home builders may require additional deposits at different stages of the construction process. The amounts and timing will be discussed and clearly outlined in the sales agreement, but you can always ask the sales team if you have any questions.
Keep in mind, earnest money is not an extra fee. Your deposit can be applied toward your total down payment amount or closing costs. For example, if your down payment is $40,000 and you’ve already paid $10,000 as an earnest money deposit, you’ll only need to bring the remaining $30,000 at closing.
Artisan 4 Floor Plan, Artisan Portfolio, Brighton Crossings Community, Brighton, Colorado
When is Earnest Money Due?
Earnest money is usually due within one to three business days after your offer is accepted. It’s usually submitted by check or wire transfer to an escrow company, title company, or in trust by a real estate attorney.
Home builders often require the deposit at the time you sign the purchase agreement to lock in pricing and reserve your lot or home. In some cases, additional payments may be required later in the process, such as when you finalize design selections or reach certain construction milestones.
Where Does the Money Go?
Your earnest money deposit is held in an escrow account by a neutral third party until closing, such as a title company, escrow firm. In Canada, this is often held in trust by the listing brokerage or the buyer’s lawyer.
An officer or agent will manage the process by collecting and holding funds and documents while ensuring both parties meet the agreed-upon conditions as outlines in the purchase contract. At closing, the money is applied toward your down payment or closing costs.
Is Earnest Money Refundable?
It can be—depending on the terms of your contract and the reason for cancellation.
In a traditional resale transaction, earnest money is usually refundable if the buyer cancels the contract for a valid reason protected by a contingency clause. Common examples include:
• Financing – You’re unable to get loan approval.
• Inspection – The home inspection reveals major issues, and the seller won’t fix them.
• Appraisal – The home appraises for less than the purchase price, and the deal can’t be renegotiated.
If the deal falls through for a reason covered by one of these contingencies and within the agreed-upon timelines, you’ll likely get your earnest money back.
However, if you back out for a reason not covered by the contract or miss a deadline, the seller may have the right to keep the deposit as compensation for taking the home off the market.
Builder contracts can differ from resale agreements and may have fewer contingencies. In some cases, the earnest money deposit may become non-refundable after certain points in the process, such as finalizing design upgrades or reaching specific construction milestones.
Because the builder is often starting construction or ordering materials based on your choices, the deposit helps cover those early commitments. However, some builders do offer a brief cancellation window or partial refunds depending on how far along things are.
It’s important to review the builder’s policies up front and ask questions so you understand exactly when your deposit becomes non-refundable and under what circumstances a refund might be available.
Residence 4 Floor Plan, Townhomes Collection, Magnolia Community, Arcadia, California
Why is Earnest Money Important?
Earnest money serves as a sign of good faith. For sellers, it shows you’re serious, which can make your purchase offer more attractive. For buyers, it gives you a better chance of having your offer accepted, especially in a competitive market. For both parties, it sets expectations and builds trust in the transaction.
Frequently Asked Questions: Earnest Money Deposits
Q: Can I lose my earnest money?
A: Yes, if you break the contract terms or miss deadlines without a valid contingency, the seller (or builder) may be entitled to keep your deposit.
Q: Is earnest money the same as a down payment?
A: No. Earnest money is a separate deposit made upfront to secure the purchase contract. It’s often applied to your down payment or closing costs at closing.
Q: Do builders have different rules for earnest money?
A: Yes. Many national builders have set deposit amounts and payment schedules, different refund policies, and fewer contingencies than resale transactions. Read the contract closely and ask the sales team questions if you’re unsure about the terms.
Q: What happens to the deposit if the deal falls through?
A: If you cancel within the terms of your contingencies, you should get a refund. Outside those terms—or with some builder agreements—you could forfeit it.
Astoria Floor Plan, Duplex Collection, Edgemont Community, Edmonton, Alberta
Earnest money deposits are a key part of the homebuying process, signaling your serious intent to purchase and protecting both the buyer and seller. While the details can vary, understanding when the deposit is due, how it’s handled, and under what conditions it may be refundable will help you move forward with confidence.
Before signing anything, take time to review the contract terms, ask questions, and make sure you’re clear on what your deposit covers. A little clarity upfront can go a long way toward a smooth and successful transaction.
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The information provided in this blog post is for informational purposes only and should not be considered investment, professional, or legal advice. Please consult a professional before making real estate decisions. Brookfield Residential is not responsible for any actions taken based on the information provided.
