What Does Earnest Money Mean?

In Summary:

• Earnest money is an optional, good-faith deposit made by a buyer that a third party holds in escrow until authorized, such as through the closing of a property sale.
• These deposits can vary in size and strength, so it’s essential to clearly document their purpose and terms as agreed upon between buyer and seller.
• Working with a local real estate professional ensures that any earnest deposit offer is respected and handled appropriately, protecting your interests and your offer.

When we discuss earnest money with buyers, we sometimes hear the same question repeatedly: “What does earnest money mean and what can it buy me?”. In truth, it can feel like an imprecise term, but it highlights a sincere intent to purchase a home rather than a verbal offer, which can feel less precise or binding.

Understanding the steps you need to take to handle money in good faith can earn you a lot of respect from the seller, which is why Schulte & Co. advises buyer on how to use these to ensure that other parties take your offers seriously.

What Does “Earnest Money” Mean?

As mentioned before, earnest money is a good-faith deposit the buyer makes when buying a home. However, the final transfer of the deposit to the seller does not occur until the seller accepts the buyer’s offer, and it usually remains in a third-party escrow account until the parties close out the property transaction.

The purpose of such a deposit is to act in good faith and display to the seller that you genuinely intend to buy the home. It allows them to invest their time in you, knowing that you are serious about a purchase and that you have the ability to secure such a deposit, and alongside letters from lenders, can signal that you have the capability to make the full purchase.

Typical Example of an Earnest Money Transfer

A typical example of such a deposit for a property with a listing price of $600k would be:

• The buyer offers a 2% Earnest Money Deposit (EMD) to the seller, in this case equalling $12,000, and should include a deadline in their communication.

• The seller chooses whether they accept the offer.

• If the seller accepts, the buyer sends the EMD to an escrow before the deadline.

• The buyer then conducts inspections and appraisals and seeks loan approval.

If the buyer accepts the state of the property and secures a loan:

• The escrow sends the deposit to the buyer, less the amount they send to the seller which are typically applied toward a down payment or closing costs.

If the buyer cancels within the agreed contingencies, such as a time window:

• The escrow returns the deposit to the buyer.

Finally, the buyer may forfeit the deposit after contingencies are removed or expire. Typically, they cannot reclaim them.

Why Earnest Money Matters

Buyers often offer earnest money during negotiations to demonstrate their reliability by assuming the risk. Your transfer protects you by showing your intent, but it is money that the escrow releases towards the final purchase.

A well-structured EMD promise can make your offer much more competitive without you having to overpay for the property's final price. Laying the money on the proverbial table in this way ensures that the seller understands your motivations and that you are “leaning in” instead of only sending offer queries. Offering a short, clear contingency window also informs the seller that you intend to move quickly and are focused on completing the sale.

What Happens to Earnest Money at Closing

As mentioned previously, earnest money typically goes toward a down payment or closions part of the Closing Disclosure or Statement. However, if a deal falls through before the parties finalize closing, it will depend on the agreement between the parties.

In some unique situations, buyers might also choose to authorize that the EMD, or a portion of it, be transferred to the seller early when the closing hits specific milestones. The feeling here is that both parties have an incentive to move towards closing.

When Can You Lose Earnest Money

Above, we discussed the fact that people can lose earnest money. Generally, the two parties will agree on the circumstances under which the funds will be transferred to the seller or returned to the buyer. These “contingencies” define who receives what and when.

Typical situations that lead to a loss of earnest money for the buyer include:

• Withdrawing the funds after waiving contingencies

• Missing key deadlines

• Misrepresenting funds

• Fraud

More circumstances exist that could mean the money moves elsewhere, but typically, if there are disputes, then the escrow will freeze the deposit until they receive an explicit agreement from both parties or a court orders a release.

Paige Schulte has plenty of experience helping buyers avoid these situations. She can advise you on the best steps to protect your deposit, with clear documentation and a full understanding of the process.

How a Realtor Helps Protect Your Earnest Money

Paige’s experience managing every aspect of a property purchase for clients gives her a deep understanding of EMDs, including how best to comply with local laws and regulations. 

She and her team have processes in place after many years of working with clients in Gig Harbor and beyond, and they can coordinate with you, the seller, and parties such as the lender and escrow. Through these steps, she can help you follow any contingencies, protecting your investment.

Move Money with a Guide Who Suits Your Needs

You don’t need to Google the term “What does earnest money mean?” anymore. With our advice, you should have everything you need to get started on your next purchase and clearly display your trustworthiness as a buyer.

So, if you’re thinking about buying a Gig Harbor home, Paige’s team can guide you every step of the way — including helping you understand precisely where your money goes. Schedule a call today and learn more about what she can do for you, as a buyer, moving forward.

FAQs: Earnest Money in Real Estate

What does earnest money mean when buying a house?

Earnest money is a good-faith deposit that shows a buyer’s intent to purchase a property. It’s typically held in an escrow account until closing, when it’s applied toward the down payment or closing costs. It reassures the seller that the buyer is serious about completing the sale.

How much earnest money should I put down?

Earnest money deposits usually range from 1% to 3% of the purchase price, though competitive markets like Gig Harbor may see higher offers. The right amount depends on your budget and how much you want to demonstrate your commitment to the seller.

Is earnest money refundable?

Yes—earnest money is refundable in most cases if a buyer backs out for reasons covered by contingencies, such as financing, inspection, or appraisal issues. If a buyer cancels outside of those terms, they may forfeit the deposit to the seller.

Who holds earnest money until closing?

Earnest money is held by a neutral third party—usually an escrow company, title company, or real estate brokerage—until the transaction closes or terminates. This ensures the funds are safely managed and released only under agreed conditions.

Can a real estate agent help protect my earnest money?

Absolutely. An experienced Realtor like Paige Schulte will help you define clear contingencies, meet deadlines, and ensure your deposit is properly documented and protected in escrow—so you don’t risk losing it unnecessarily. Contact Schulte & Co. to learn how to safeguard your earnest money during your next home purchase.