<h2What Is Earnest Money?</h2<pEarnest money, also called a good faith deposit, is a sum of money the buyer submits with their purchase offer to demonstrate serious intent to purchase the property.
It is not a down payment, though it is typically applied toward the buyer's closing costs or down payment at closing.
Earnest money signals to the seller that the buyer is committed and has skin in the game — a buyer who walks away from a contract without a valid reason forfeits their earnest money to the seller.</p<h2How Much Earnest Money Is Standard?</h2<pEarnest money is typically 1 to 3 percent of the purchase price, though in competitive markets buyers sometimes offer more to make their offer stand out.
On a $300,000 home, a standard earnest money deposit would be $3,000 to $9,000.
A very low earnest money deposit — say, $500 on a $300,000 home — is a yellow flag that the buyer may not be fully committed.
You can counter an offer by requesting a higher earnest money deposit.</p<h2Where Should Earnest Money Be Held?</h2<pThis is the most important question for FSBO sellers.
Earnest money must be held in a neutral third-party escrow account — never in your personal bank account.
Holding a buyer's earnest money in your own account creates significant legal liability and is illegal in most states.
The appropriate holder is your title company or closing attorney, who will hold the funds in their escrow account until closing.
When you open escrow with your title company, provide them with the earnest money check or wire transfer instructions immediately.</p<h2When Can a Buyer Get Their Earnest Money Back?</h2<pBuyers can recover their earnest money if they cancel the contract within the terms of a valid contingency — for example, if the home fails inspection and the buyer exercises their inspection contingency, or if they cannot obtain financing within the financing contingency period.
Buyers forfeit their earnest money if they cancel the contract without a valid contingency reason — for example, if they simply change their mind after all contingencies have been removed.
The purchase agreement should clearly specify the conditions under which earnest money is refundable or forfeited.</p<h2Earnest Money Disputes</h2<pEarnest money disputes are one of the most common sources of conflict in real estate transactions.
If a buyer cancels and you believe they have forfeited their deposit, the title company will not release the funds without written agreement from both parties or a court order.
To minimize dispute risk, use a clear, well-drafted purchase agreement that specifies exactly when earnest money is refundable and when it is not.
Many FSBO sellers hire a real estate attorney to review the purchase agreement for this reason.
FSBOHub's vendor directory includes real estate attorneys in your area who can review your contract for a flat fee.</p