Earnest Money Deposits: How They Work and How to Protect Yours

When you make an offer on a home, you will often include an earnest money deposit, sometimes called an EMD or good faith deposit. It is your way of showing the seller you are serious. Because it can be a meaningful sum of money, it pays to understand exactly how it works before you write that check.

What Earnest Money Is For

Once a seller accepts your offer, they typically take the home off the market or stop considering other buyers. That is a risk for them. If you walked away for no reason, they could lose weeks of potential showings. Earnest money gives the seller some assurance that you intend to follow through.

The amount is negotiable and often depends on local customs, the price of the home and how competitive the market is. In a busy market, a larger deposit can help make your offer more attractive. Your real estate agent can tell you what is typical in your area.

Where the Money Goes and When

Earnest money is not handed directly to the seller. After your offer is accepted, you typically deliver the deposit within a set number of days, often by wire, check or electronic transfer. It is held in a separate escrow or trust account, usually by a title company, closing attorney or other neutral party named in the contract.

The funds stay there while you complete inspections, the appraisal and your loan approval. At closing, the deposit is credited toward your down payment or closing costs, so it is part of the money you were already going to bring, not an extra fee.

A quick word on wire fraud

Scammers sometimes send fake emails that look like they come from a title company or agent with new wiring instructions. Always confirm instructions by calling a phone number you know is legitimate before sending money, and never rely on contact details in an unexpected email.

When You Can Get It Back

Whether your deposit is refundable depends on the terms of your purchase contract. This is where contingencies come in. A contingency is a condition that must be met for the sale to move forward. Common ones include:

• Inspection contingency: Allows you to back out or negotiate if the inspection reveals problems.
• Financing contingency: Protects you if your loan is not approved by a certain date.
• Appraisal contingency: Gives you options if the home appraises for less than the purchase price.
• Sale of current home: Lets you cancel if you cannot sell your existing home in time.

If you cancel within the terms of a contingency and follow the contract’s deadlines and notice requirements, your deposit is typically returned. If you back out for a reason not covered by the contract, or miss a deadline, the seller may be entitled to keep it.

In competitive markets, some buyers offer a deposit that becomes nonrefundable after a certain point, or waive certain contingencies, to make their offer stand out. That can work, but it also increases your risk. Make sure you fully understand what you are agreeing to.

Tips to Protect Your Deposit

1. Get pre-approved before making offers so financing surprises are less likely.
2. Read every deadline in your contract and put them on your calendar.
3. Schedule inspections right away so you have time to review results.
4. Keep your finances steady during the process. Avoid new debt or job changes.
5. Ask your agent or an attorney to explain any term you do not understand.

Your earnest money also counts as part of your cash to close, so plan for it alongside your down payment. Our first-time home buyer page and mortgage calculator can help you prepare.

Questions about how much cash you will need for your purchase? Talk with a FLO Mortgage loan officer and we will help you plan every dollar.

This article is for general education and is not a commitment to lend. All loans are subject to credit approval, underwriting guidelines and program availability. FLO Mortgage, Company NMLS #1835856. Equal Housing Opportunity.