A long time ago, a firm handshake was as good as your signature.
If you really wanted to seal the deal, a little spit in your palm wouldn’t hurt. But those days are gone, and not just because it’s unhygienic.
Today, when buying a home, you need something a bit more substantial to convince a seller to take their property off the market. They want something solid, which is where earnest money comes into play.
In this blog article, we’ll answer the question: what is earnest money? We’ll also explore how much you may need, why it matters for self-employed buyers, how contingencies protect your deposit, the common mistakes to avoid, and what happens to the money once you reach the closing finish line.
What Is Earnest Money?
Earnest money is a deposit you include with your home purchase offer to show the seller that you’re serious about buying their home. When a seller sees that deposit, it tells them you’re done window shopping and ready to do business.
Is earnest money the same as a down payment?
No.A down payment and earnest money sound similar, but they play very different roles.
Your down payment is a big chunk of money you bring to the table at closing.
It’s part of the final purchase, and it only comes into play once your loan is approved and everything is ready to wrap up. Most realtors will say 20% as a down payment is industry standard, but it can be less.
Earnest money happens earlier. It’s the deposit you put down when you make your offer.
And here’s a key part: earnest money isn’t an extra fee. At closing, the deposit gets applied to your down payment or closing costs. It’s all part of the same pot of money. You’re just putting a portion of it down sooner.
Who holds the earnest money?Once your offer is accepted, the deposit needs to go somewhere safe and neutral: an escrow account.
Escrow is a third party that holds your funds and key documents during the transaction. Their job is to protect both sides until the deal closes. In many states, this role is handled by a title company. In others, a real estate attorney takes the lead.
A few states don’t use a traditional escrow system at all, but the idea is the same. Someone who isn’t the buyer or seller holds the deposit, so everything stays fair and documented.
Once earnest money is in that account, it sits there until closing day, when it’s applied to your down payment or closing costs.
Earnest money is part of a legally binding purchase agreement. When you put down earnest money, you agree to the terms of the contract you sign with the seller. Those terms outline your rights, the seller’s rights, and the conditions that decide what happens to the money.
This is where contingencies matter. They spell out the situations where you can get your earnest money back and the situations where the seller may be allowed to keep it—we’ll get into contingencies later.
How Much Earnest Money Do You Need?
There’s no rule, but most earnest money deposits fall between one percent and three percent of the purchase price.
In a competitive market, some buyers may choose to put down more so they can stand out among potential buyers.
A higher deposit signals confidence and commitment, which can help your offer rise above others without increasing your actual cost. In slower markets, it often stays at the lower end.
Since the money is credited to your down payment or closing costs, it doesn’t raise the total cost of buying the home. You’re just shifting part of your funds to the beginning of the process.
Still, it’s smart to plan for it so the offer stage doesn’t catch you off guard.
Why Earnest Money Matters for Self-Employed Buyers, Entrepreneurs, and Gig Workers
If you work for yourself, run your own business, or earn income through gigs, earnest money plays an even more important role. Your income may not look like a traditional paycheck, so sellers sometimes want extra reassurance that the deal will move forward.
Here’s why earnest money helps:
- Your income may fluctuate, so having earnest money ready shows you’re prepared and organized.
- Sellers gain confidence when they see funds in place, especially if your income structure is non-traditional.
- It gives your pre-approval more weight, showing that you’re serious and financially capable.
- It helps your offer compete with W-2 buyers who may appear like a safer bet on paper.
For anyone juggling clients, gigs, or a growing business, earnest money is one of the easiest ways to make a strong first impression.
Pair that with a non-traditional lender like Quontic, who understands non-traditional income and moves quickly with your paperwork, and you can stay confident and competitive when the right home shows up.
The Role of Contingencies
A contingency is a benchmark in the contract that must be satisfied for the sale to move forward.
There are many types of contingencies, and each one covers a different part of the homebuying process. These conditions help make sure the home is what you expect, the loan comes through, and nothing major gets overlooked.
Contingencies also play a big role in what happens to your earnest money.
If a contingency isn’t met, it might give you the right to cancel the deal and keep your deposit. But if you cancel the purchase for a reason that’s not protected by a contingency, the seller may be allowed to keep your earnest money.
This is why understanding your contingency terms is just as important as understanding the offer itself.
The Appraisal Contingency
Before your lender approves your loan, they order an appraisal to make sure the home is worth what you offered.
If the appraised value comes in lower and you and the seller can’t agree on a new price, the appraisal contingency lets you walk away and keep your earnest money.
The Financing Contingency
If your loan approval changes and you’re unable to secure financing, this contingency protects you.
If you followed the steps outlined in the contract, your earnest money should be returned.
The Inspection Contingency
A home inspection can reveal issues you wouldn’t have caught on your own, from small repairs to big structural problems.
If the seller won’t address the issue, the inspection contingency gives you the option to walk away and get your earnest money back.
Earnest Money Mistakes to Avoid
Earnest money is meant to protect you, but buyers can still lose their deposit if they’re not careful.
Many problems come from rushing, skipping details, or assuming the contract works the same way in every situation.
Here are some of the biggest missteps to watch out for.
- Skimming over the contract: Not reading the fine print can leave you unsure of the rules that decide what happens to your earnest money.
- Missing deadlines: If you miss a contingency deadline, your protection can expire, and you may lose your deposit.
- Not documenting issues the right way: Inspection problems must be reported exactly as the contract requires, or the seller may dispute your right to a refund.
- Sending money to the wrong place: Wire fraud is common, so always confirm wiring instructions directly with the escrow company or attorney.
- Offering more than you can comfortably afford in a bidding war: A bigger deposit can strengthen your offer, but putting down too much can cause stress if anything changes later.
Avoiding these mistakes helps keep your deposit protected, your contract on track, and the process far smoother.
What Happens to Your Earnest Money?
At the end of the transaction, there are three possible outcomes.
1. It’s applied to your down payment or closing costs when the deal closes.
2. It’s refunded to you if you walk away due to a valid contingency.
3. It’s forfeited if you cancel the contract without a contingency that allows it.
This is why understanding your timelines and contract details is so important.
Earnest Money and the Homebuying Process
Buying a home used to be as simple as a handshake and a promise.
Today, it takes a few more steps, but earnest money brings some of that trust and good faith back into the process.
If you are self-employed or earning income on your own terms, earnest money is also a simple way to show sellers you are prepared and serious.
And when you want guidance that fits the way you work and earn, Quontic can help.