Earnest money agreement

What an earnest money agreement is

An earnest money agreement is a written record of a deposit a buyer puts down when making an offer to purchase property, most often a home. The deposit, called earnest money or a good faith deposit, signals to the seller that the buyer is serious and intends to follow through. In many transactions the earnest money terms are built into the purchase agreement itself, and a separate earnest money agreement or receipt documents the deposit and the conditions attached to it.

The earnest money is not an extra fee. If the sale closes, it is applied toward the purchase price or closing costs. Its real job is to give the seller some assurance while the deal is worked out, and to give both sides a clear rule for what happens to the money if the deal falls apart.

This is general information, not legal or tax advice. Rules vary by state and province, and the right choice depends on your facts. For anything important, check with a qualified professional.

How earnest money works

Once an offer is accepted, the buyer typically delivers the earnest money to a neutral third party, such as an escrow company, a title company, or a broker's trust account, rather than directly to the seller. Holding the money in escrow protects both sides, because neither can simply take it. The funds stay there while the buyer completes steps like inspections, appraisal, and financing. At closing, the earnest money is credited toward what the buyer owes. If the deal does not close, the agreement and its conditions decide who receives the deposit.

When is earnest money refundable?

Whether the buyer gets the deposit back usually comes down to the contingencies written into the purchase agreement. A contingency is a condition that must be met for the deal to go forward, and it often lets the buyer walk away and keep the deposit if the condition is not satisfied. Common contingencies include:

• Inspection contingency. The buyer can back out if the inspection reveals serious problems.
• Financing contingency. The buyer can cancel if their mortgage is not approved.
• Appraisal contingency. The buyer can renegotiate or exit if the property appraises below the price.
• Title contingency. The buyer can walk if the title is not clear.

If a valid contingency is not met, the buyer usually recovers the earnest money. If the buyer simply changes their mind or misses a deadline without a contingency to rely on, the seller may be entitled to keep the deposit. The exact outcome depends on the contract wording and local law.

What an earnest money agreement includes

• The parties. The buyer and seller, by full name.
• The property. The address and legal description of what is being purchased.
• Purchase price and deposit. The agreed price and the amount of earnest money.
• How the deposit is held. The escrow agent or trust account holding the funds.
• Contingencies. The conditions that let the buyer recover the deposit.
• Deadlines. Dates for inspection, financing, and closing.
• What happens on default. Who receives the deposit if the buyer or seller fails to close.
• Signatures. Both parties sign and date, and each keeps a copy.

How much earnest money is normal?

There is no fixed rule, and the amount is negotiated. Earnest money is usually a percentage of the purchase price, and a stronger deposit can make an offer more attractive to a seller in a competitive market, while a smaller deposit reduces the buyer's risk if the deal falls through outside a contingency. Local custom and market conditions influence what is typical. Because it is negotiable, discuss the amount with your agent and make sure it is spelled out clearly in the agreement.

Protecting your deposit

A few habits reduce the risk of losing earnest money. Keep your contingencies in place until their conditions are actually satisfied, and do not waive them lightly. Track every deadline, since missing one can put the deposit at risk. Deliver the money to a neutral escrow holder rather than the seller directly, and get a receipt. Read exactly what the agreement says happens on default before you sign. If a dispute over the deposit arises, the escrow holder generally cannot release the funds until both sides agree or a decision is made, so clear contract terms are your best protection.

Rules vary by location

Real estate contracts and deposit rules are set at the state and provincial level and vary. Standard purchase agreement forms, common contingencies, escrow practices, and the rules for who keeps a disputed deposit differ from place to place. In Canada, a similar good faith deposit is common in a purchase agreement, with its own provincial rules. Because a home purchase is a major transaction, confirm the rules where the property is and consider working with a real estate professional or lawyer.

Earnest money vs down payment

These two are easy to confuse, but they play different roles. Earnest money is a good faith deposit paid soon after an offer is accepted, held in escrow to show the buyer is serious. A down payment is the portion of the purchase price the buyer pays at closing, with the rest usually covered by a mortgage. The earnest money is not extra money on top of the price. When the deal closes, it is credited toward what the buyer owes, so it effectively becomes part of the down payment or closing costs. The key difference is timing and purpose: earnest money secures the deal early, while the down payment finalizes the purchase at the end.

What happens in a deposit dispute

If a sale falls apart and the buyer and seller disagree over who keeps the earnest money, the escrow holder is usually stuck in the middle and cannot release the funds until the dispute is resolved. Often the contract itself points to an answer, for example if the buyer properly cancelled under a contingency, the money goes back to them, while a buyer who walked away without a valid reason may forfeit it to the seller. When the contract is unclear or both sides claim the money, resolving it can take a signed release from both parties, mediation, or in some cases a legal decision. This is exactly why the agreement should state clearly what happens on default before anyone signs.

Tips for buyers and sellers

• Buyers: keep your contingencies until their conditions are met, track every deadline, and never hand the deposit directly to the seller.
• Buyers: read the default section so you know exactly when you could lose the money.
• Sellers: make sure the agreement spells out the deposit amount, where it is held, and the conditions for keeping it.
• Both: use a neutral escrow holder and get a written receipt for the funds.
• Both: put every change in writing, since verbal side agreements are hard to enforce.

Fill out and sign an earnest money agreement online

You can complete an earnest money agreement or deposit receipt on your computer. Open our fill a PDF tool, add the template, type in the parties, property, price, deposit, and contingencies, and download the finished document. It is processed in your browser, so your transaction details stay on your own device.

When it is ready, the sign a PDF tool lets the buyer and seller draw, type, or upload a signature and place it on the page. For related documents like a bill of sale or letter of intent, browse the form templates library.

Keep your purchase documents together

A property purchase generates an offer, deposit receipts, disclosures, and closing paperwork. Create a free account on fillable.ca to save your filled earnest money agreement and related documents, track the deadlines, and keep everything organized in one place.