What Is an Earnest Money Deposit? Your Guide to This Key Real Estate Step

Imagine you’ve just found the perfect home. You’re excited, your heart is racing, and you want to show the seller you’re serious about buying. That’s where an earnest money deposit comes in—a small but mighty gesture that can make a big difference in a real estate transaction.

What Is an Earnest Money Deposit?

An earnest money deposit (often called “good faith money”) is a sum of money a buyer puts down when making an offer on a home. Think of it as a handshake—an assurance to the seller that you’re committed to the deal. In most cases, this deposit is held in an escrow account until closing.

Why Is It Important?

For sellers, an earnest money deposit provides peace of mind. It shows you’re not just window-shopping—you’re ready to move forward. For buyers, it signals your intent and can make your offer stand out in a competitive market.

How Much Should You Expect to Pay?

In North America, earnest money deposits usually range from 1% to 3% of the home’s purchase price. For example, if you’re buying a $400,000 home, your deposit might be between $4,000 and $12,000. The exact amount can depend on local customs and how hot the market is.

What Happens to the Money?

• If the deal goes through: The earnest money is applied toward your down payment or closing costs.
• If the deal falls through (for a valid reason): You may get your deposit back. Common reasons include issues found during the inspection or trouble securing financing—if these contingencies are spelled out in your contract.
• If you back out without a valid reason: The seller may keep the deposit as compensation for taking the home off the market.

Tips for Buyers

• Read the contract carefully: Make sure you understand under what circumstances you can get your deposit back.
• Work with a trusted agent: They’ll help you navigate the process and protect your interests.
• Keep records: Always get a receipt and know where your money is being held.

In short, an earnest money deposit is a key step in showing you’re serious about buying a home. It can give both buyers and sellers a sense of security as they move toward closing—and one step closer to making that dream home yours!