What is earnest money and how much should I require?

Earnest money, also called an earnest money deposit or EMD, is a sum of money the buyer deposits when they make an offer or go under contract. It's held in escrow by a title company or attorney as a demonstration of good faith and financial commitment to the purchase.

Think of it as a financial signal. A buyer who puts meaningful earnest money on the table is telling you they're serious. A buyer who offers minimal or no earnest money is either not serious or not well-advised, and that's information worth having before you take your home off the market for them.

The standard varies by market, but 1 to 3 percent of the purchase price is common in most areas. On a $400,000 home, that's $4,000 to $12,000. In highly competitive markets, buyers sometimes offer more to make their offer stand out. As a FSBO seller, you can specify in your offer instructions what earnest money amount you expect. Buyers can offer more or less, but setting an expectation upfront helps screen out unserious offers.

Earnest money is generally refundable if the buyer exits the contract through a legitimate contingency, inspection, financing, appraisal. Those are defined exit ramps built into the contract. Where earnest money becomes non-refundable is if the buyer backs out without a legitimate contingency basis. If the buyer simply changes their mind after all contingencies are satisfied and the closing date approaches, in most cases the seller is entitled to retain the earnest money as liquidated damages.

Who holds the earnest money matters. It should be held in escrow by a neutral third party: a title company, an attorney, or a licensed escrow agent. Some buyers or their agents may suggest that the buyer's brokerage hold the deposit. This can create complications if there's a dispute about whether the deposit should be refunded or released to the seller. A neutral professional third party holding the funds is cleaner and reduces conflict if things go sideways.

At a clean closing, earnest money is typically applied toward the buyer's closing costs or down payment. It doesn't usually go to the seller directly. It offsets what the buyer owes at closing. If the deal falls apart, the escrow agent releases the funds based on the contract terms and, if there's a dispute, potentially based on documentation from both parties.

Earnest money is a small thing in the context of a real estate transaction, but it matters as a signal. Take it seriously when evaluating offers.