When buying a home, you may be asked to provide an earnest money deposit, often after your offer is accepted and within the timeframe stated in the purchase agreement. The amount varies by transaction, but deposits are commonly around 1% to 3% of the purchase price.
Understanding how an earnest money deposit works, how much you may need, when it’s due, whether it can be refunded, and what documentation your mortgage lender may need can help you feel more prepared when it’s time to make an offer.
What Is an Earnest Money Deposit?
Earnest money is a deposit a homebuyer typically makes after a seller accepts their offer. It is sometimes referred to as a good faith deposit because it demonstrates the buyer’s commitment to moving forward with the purchase.
Earnest money is typically held by a third party identified in the purchase agreement, such as a title company, escrow company, real estate brokerage, or attorney.
Granite Bank generally does not receive or hold the earnest money deposit. The purchase agreement identifies the party responsible for receiving and holding the funds.
If the home purchase moves forward, the earnest money is generally credited toward the amount the buyer owes at closing.
How Much Earnest Money Do You Need?
Earnest money deposits are often around 1% to 3% of the home’s purchase price, but there is no single amount that applies to every transaction.
The amount may depend on:
- The purchase price of the home
- Local real estate market conditions
- The terms of your purchase agreement
- How competitive the offer is
- Seller expectations
A buyer may consider offering a larger earnest money deposit in a competitive market, but doing so can increase the amount at risk if the transaction does not close and the deposit is not refundable under the purchase agreement. Buyers should discuss the contractual implications with their real estate professional or attorney.
Your real estate agent can help you determine an appropriate amount for your offer, while your mortgage lender can help you understand how the earnest money deposit fits into the financing process.
When Is Earnest Money Due?
Earnest money is generally due shortly after a seller accepts your offer. The specific deadline should be outlined in your purchase agreement.
Because these deadlines can be short, it is a good idea to understand how you plan to provide the funds before submitting an offer.
Always confirm the required amount, payment method, recipient, and due date with your real estate or closing professional.
What Are Acceptable Forms of Earnest Money?
The following payment methods may be used for earnest money, depending on the requirements of your transaction:
| Payment Method | Description | What the Buyer Should Know | |
| Personal Check | A check drawn from the buyer’s personal bank account. | May be accepted depending on the amount, timing, purchase agreement, and requirements of the deposit holder. | |
| Certified Check | A check guaranteed by the issuing bank, funds are verified. | Acceptance requirements vary. Confirm with the organization receiving the deposit. | |
| Cashier’s Check | Drawn from the bank’s funds, not the buyer’s account directly. | May be required or accepted for certain transactions. Confirm the payee and delivery requirements. | |
| Money Order | Prepaid, good for smaller amounts (some restrictions may apply). | May be subject to dollar limits or may not be accepted by the deposit holder. | |
| Wire Transfer | Electronic transfer of funds directly to escrow. |
|
The parties holding the earnest money determine the acceptable payment methods. Always follow the purchase agreement and confirm the payment method, recipient, amount, and deadline with the real estate or closing professional responsible for the deposit.
Be Cautious When Wiring Earnest Money
Wire fraud is a serious concern in real estate transactions. If you are instructed to wire your earnest money, carefully verify the wiring instructions before sending the funds.
Do not rely solely on wiring instructions received by email, and do not use a phone number or link contained in an unexpected message to verify the instructions. Contact the title company, escrow company, attorney, or closing professional using a trusted phone number you obtained independently. Confirm the recipient’s name, financial institution, account information, and transfer amount before sending funds.
If wiring instructions change unexpectedly, stop and independently verify the change before sending any money. If you believe funds were sent using fraudulent instructions, immediately contact your financial institution or wire-transfer provider.
Payment Methods That May Not Be Accepted for Earnest Money
Some payment methods may not be accepted or may create additional documentation or underwriting concerns:
| Payment Method | Potential Concerns | Commonly Accepted? |
| Cash | Difficult to trace the source, often not accepted by the party holding the deposit or the mortgage lender. | No |
| Postdated Checks | The deposit holder may not accept a check that cannot be processed immediately. | No |
| Credit Cards | Credit cards are not accepted because they often create additional debt that would need to be considered during mortgage underwriting, and likely incur processing fees. | No |
| Payment Apps (Venmo/PayPal) | Consumer payment apps are likely not to be accepted by deposit holders, may come with transfer delays or limits, and can create additional documentation or source-of-funds questions. | No |
Requirements can vary depending on the transaction, purchase agreement, and organization responsible for holding the deposit. Before making your earnest money deposit, confirm the acceptable payment method and any related requirements with the appropriate party.
How Does Your Mortgage Lender Verify Earnest Money?
Depending on the loan program, deposit amount, available assets, and other circumstances, your mortgage lender may need to verify that the earnest money was paid and confirm the source of the funds. The specific documents required will depend on your transaction.
This is one reason it’s important to use a payment method that creates a clear record of the transaction.
If verification is required, your lender may request one or more of the following:
- A copy of the earnest money check
- A bank statement showing the funds leaving your account
- A wire transfer confirmation
- A receipt from the title or escrow company
- Documentation showing the source of the funds
Keep copies of any receipts, checks, account statements, or confirmations associated with your earnest money deposit.
If your bank statements include recent large deposits or transfers, your lender may also ask for additional information about the source of those funds. Documentation requirements can vary by loan program and individual circumstances, so talk with your mortgage professional if you have questions about what may be needed.
Does Earnest Money Go Toward Your Down Payment?
Earnest money and your down payment are not the same thing, but the earnest money deposit is generally credited toward the amount you owe at closing when the home purchase is completed.
For example, if you provide a $5,000 earnest money deposit and your transaction successfully reaches closing, that $5,000 is generally reflected as a credit toward the funds needed to complete the purchase rather than being an additional fee paid on top of your other closing expenses.
Exactly how the funds are applied will be reflected in your closing documents.
Earnest Money vs. Down Payment: What’s the Difference?
It is easy to confuse earnest money with a down payment because both involve money a buyer contributes toward a home purchase. However, they serve different purposes.
| Â |
Earnest Money |
Down Payment |
|
Purpose |
Shows your commitment to purchasing the home |
Represents the portion of the purchase price you pay rather than finance |
|
Timing |
Generally paid during the purchase-contract process |
Typically completed as part of closing |
|
Where It Goes |
Usually held by a designated third party until closing |
Applied toward the purchase of the home |
|
Effect at Closing |
Generally credited toward the amount due if the transaction closes |
Reduces the amount of the purchase price being financed |
|
Refundable? |
Depends on the purchase agreement and circumstances |
Different rules apply |
A simple way to think about it is that earnest money is an early deposit tied to your offer and purchase agreement, while your down payment is part of how you finance the purchase of the home.
Is Earnest Money Refundable?
Whether an earnest money deposit is refundable depends largely on the terms of the purchase agreement and the circumstances surrounding the transaction.
Purchase agreements may include contingencies that allow a buyer to cancel the transaction under certain conditions while retaining the right to have their earnest money returned. Depending on the contract, these may include circumstances involving financing, the home inspection, property appraisal, or other agreed-upon conditions.
However, if a buyer walks away from the purchase for a reason that is not protected under the purchase agreement, they may risk losing some or all of their earnest money.
Because purchase agreements, circumstances, and applicable laws can vary, review your contract carefully and talk with your real estate professional or attorney if you have questions about when your earnest money may be refundable.
Frequently Asked Questions About Earnest Money Deposits
Can You Lose Your Earnest Money?
Yes. A buyer may risk losing their earnest money if they do not meet the obligations outlined in the purchase agreement or cancel the purchase under circumstances that are not protected by the contract.
The specific terms of the purchase agreement determine when earnest money may be retained or returned.
Can Earnest Money Be Refunded if Financing Falls Through?
It depends on the terms of your purchase agreement.
If your agreement includes an applicable financing contingency and its requirements are met, the contract may provide for the return of your earnest money if you are unable to obtain financing.
Without an applicable contingency or other contractual protection, the outcome may be different. Review your purchase agreement and consult your real estate professional or attorney regarding your specific circumstances.
Does Earnest Money Count Toward Closing Costs?
If the transaction successfully closes, the earnest money deposit is generally credited toward the amount the buyer owes at closing.
Depending on the transaction, this can reduce the remaining amount you need to bring to closing. Your final closing documents will show exactly how your earnest money deposit is being applied.
Can Gift Funds Be Used for Earnest Money?
Gift funds may be permitted depending on the mortgage loan program and your individual circumstances, but specific documentation requirements may apply.
If someone else is providing money that you plan to use toward your home purchase, talk with your mortgage lender. Your lender can explain whether the funds are eligible for your loan program and what documentation may be required.
What Proof of Earnest Money Does My Mortgage Lender Need?
Requirements can vary, but your lender may request documentation showing both that the earnest money was paid and, when applicable, where the funds came from.
Documentation could include:
- A copy of the check
- Bank statements
- Wire transfer documentation
- A receipt or confirmation from the organization holding the deposit
Keeping a clear paper trail from the beginning can make it easier to provide documentation if your lender requests it.
The Takeaway: Preparation Is Key
When buying a home, you’ll want to be prepared to put down an earnest money deposit. These general guidelines can help you prepare, but the requirements for your transaction should always be confirmed with the appropriate real estate or closing professional.
Understanding how much earnest money you may need, when it is due, how it can be paid, and what documentation to keep can also help you avoid unnecessary complications during the homebuying process.
Remember that earnest money requirements can vary based on the purchase agreement, local practices, and your individual transaction. Before sending funds, verify the amount, payment method, recipient, and deadline with the appropriate real estate or closing professional.
If you’re preparing to purchase a home, a Granite Bank mortgage professional can help you understand how your earnest money, down payment, closing costs, and other funds fit into your overall home financing plan. Search for a loan officer.Â
This information is provided for general educational purposes only and is not legal, real estate, or financial advice or a commitment to lend. Earnest money requirements, acceptable payment methods, refund rights, and documentation requirements vary by transaction. Review your purchase agreement and consult the appropriate real estate, closing, or legal professional regarding your specific circumstances. All loans are subject to underwriting and applicable loan requirements.
