Earnest Money
A good-faith deposit a home buyer provides with a purchase offer to demonstrate serious intent, typically held in escrow until closing.
What is Earnest Money?
Earnest money (also called a good-faith deposit or escrow deposit) is a sum of money a buyer submits along with a purchase offer to signal to the seller that the buyer is serious about completing the transaction. The deposit is held in escrow—by the title company, escrow company, or a real estate brokerage—until closing, at which point it is applied toward the buyer's down payment or closing costs. Earnest money amounts typically range from 1%–3% of the purchase price in most US markets, though competitive markets may see deposits of 5%–10%. If the buyer backs out for reasons covered by a contingency (financing, inspection, or appraisal), the earnest money is generally returned in full. If the buyer defaults without a valid contingency, the seller typically retains the earnest money as liquidated damages. Sellers who back out of a signed contract may be required to return the earnest money—potentially double the amount—and face additional legal liability.
Example
A buyer submits a $500,000 purchase offer with 2% earnest money ($10,000) held in escrow by the title company. The contract includes a 10-day inspection contingency. After the inspection reveals a needed roof replacement, the buyer requests a $15,000 price reduction. The seller counters with a $7,500 credit. If negotiations fail and the buyer exercises the inspection contingency within the allowed period, all $10,000 in earnest money is returned. If the buyer instead waived the contingency and walked away without cause, the seller would retain the $10,000 as liquidated damages.
Source: Consumer Financial Protection Bureau — Buying a House