Learn · Buying & Selling
Earnest Money and Escrow Explained
What earnest money is, how much to put up, when you get it back, and how escrow protects both parties.
Earnest money and escrow are two of the most misunderstood parts of a real estate transaction. Understanding them protects both buyer and seller — and prevents costly mistakes.
What Is Earnest Money?
Earnest money (also called a "good faith deposit") is money the buyer deposits when their offer is accepted. It shows the seller the buyer is serious and compensates the seller if the buyer backs out without a valid reason.
Typical amount
1–3% of purchase price
Higher amounts signal stronger commitment in competitive markets
Who holds it
Title company or escrow agent
Never give earnest money directly to the seller
When it's paid
Within 1–3 days of accepted offer
Per the contract terms — missing this deadline can void the deal
When Does the Buyer Get It Back?
Earnest money is refundable — but only under the right circumstances. Your contingencies are your protection.
Financing contingency triggered
Buyer's loan is denied after good-faith effort. Buyer gets earnest money back.
Inspection contingency triggered
Inspection reveals issues and parties can't agree on resolution. Buyer walks and gets money back.
Appraisal contingency triggered
Home appraises below purchase price and seller won't reduce price. Buyer gets money back.
Buyer backs out without contingency
Buyer changes their mind with no contractual basis. Seller typically keeps earnest money.
Seller backs out
Seller is in breach. Buyer gets earnest money back and may have grounds for further legal remedy.
Transaction closes
Earnest money is credited toward the down payment or closing costs at closing.
What Is Escrow?
Escrow is a neutral third-party arrangement where money and documents are held until all conditions of the transaction are met. It protects both buyer and seller.
During the transaction
The escrow/title company holds the earnest money, collects the buyer's down payment and loan funds, and disburses them at closing only when all conditions are satisfied.
For ongoing property taxes and insurance (mortgage escrow)
Most lenders require an escrow account for property taxes and homeowner's insurance. A portion of each mortgage payment goes into this account, and the lender pays the bills on your behalf when due.
Who manages escrow?
In most states, a title company handles both title and escrow. In some states (NY, FL, etc.), a real estate attorney handles the closing and escrow function. Either way, the escrow agent is a neutral party with fiduciary obligations to both buyer and seller.
Common Mistakes to Avoid
- Paying earnest money directly to the seller — always pay to the escrow/title company
- Missing the earnest money deposit deadline — even one day late can give the seller grounds to void the contract
- Waiving contingencies without understanding what you're giving up — each contingency is a right to cancel and recover your money
- Not understanding your escrow impound account — if your lender manages your taxes and insurance, make sure they're actually paying on time