What Is Earnest Money in Real Estate?

Earnest money is a deposit made by the buyer to demonstrate good faith when making an offer. It typically ranges from 1% to 3% of the purchase price and is held in an escrow account until closing.

In my experience, earnest money reassures sellers that a buyer is serious. If the buyer backs out for reasons not covered by contingencies, they may forfeit the deposit. But if the deal closes, the funds are usually applied to the down payment or closing costs. Understanding the terms that govern earnest money can prevent costly misunderstandings later.