What Is Earnest Money? Everything Sellers Need to Know

Earnest Money Defined

When a buyer submits a purchase offer on your home, they typically include an earnest money deposit — also called an EMD or "good faith deposit." This is real money placed into a neutral escrow account to demonstrate that the buyer is committed to following through.

Think of it as the buyer putting their money where their mouth is.

Earnest money is not a payment to you. It sits in a third-party escrow account — typically held by a title company, escrow company, or real estate attorney — until closing. At closing, it's credited toward the buyer's down payment or closing costs.

If the deal falls through:

• Buyer has valid contingency: Earnest money is returned to the buyer
• Buyer backs out without cause: You may keep the earnest money
• Seller backs out: Earnest money is returned to the buyer, and you may face additional legal liability

How Much to Require

The standard earnest money deposit ranges from 1–3% of the purchase price. On a $400,000 home, that's $4,000–$12,000.

What's "normal" depends on your market:

Market Type	Typical EMD
Buyer's market (slow)	0.5–1%
Normal market	1–2%
Competitive market	2–3%+
Hot seller's market	3–5% (sometimes more)

In competitive markets, buyers often voluntarily increase their earnest money to make their offer stand out. A buyer offering 3% EMD is signaling strong commitment compared to one offering 0.5%.

As a FSBO seller, you can specify a minimum EMD in your listing terms or counter-offer. There's no law dictating the amount — it's negotiable.

Our recommendation: Require at least 1% for standard markets, 2% in competitive ones. Higher EMD = more committed buyer = fewer last-minute cancellations.

Who Holds the Earnest Money (Escrow)

Earnest money should always go to a neutral third party — never directly to you as the seller. Holding earnest money yourself creates legal exposure and is considered improper in most states.

Who typically holds it:

• Title company — Most common in non-attorney states
• Escrow company — Common in Western states
• Real estate attorney — Required or common in attorney states (NY, GA, SC, etc.)
• Buyer's broker's trust account — Less common in FSBO transactions since there's no buyer's broker escrow account associated with you

For FSBO sales, your title company or closing attorney will typically hold the earnest money once you go under contract. In the offer stage, you can specify where funds should be sent upon acceptance.

Important: The earnest money should be deposited within 1–3 business days of offer acceptance. Verify receipt of the wire confirmation or check. If the buyer delays or can't produce funds, that's a serious red flag about their financial readiness.

When You Keep It vs. Return It

This is where sellers get tripped up. Earnest money is not automatic — keeping it depends on the terms of the purchase agreement.

Buyer Gets It Back When:

• Financing contingency: Buyer applied in good faith and was denied. They have documentation from the lender.
• Inspection contingency: Buyer found major defects and exercised the right to back out (within the inspection period, per contract terms).
• Appraisal contingency: Home appraised below purchase price and buyer exercises the appraisal contingency.
• Home sale contingency: Buyer's home didn't sell and contract included this contingency.
• Title issues: Title search reveals unresolved issues that can't be cleared before closing.

You Keep It When:

• Buyer simply changes their mind (no valid contingency)
• Buyer can't obtain financing and had waived the financing contingency
• Buyer misses the closing date and refuses to extend
• Buyer backs out after all contingency periods have passed

It's Complicated When:

• Buyer claims a contingency was exercised but you dispute it
• Parties disagree on whether a discovered defect was "material"

In disputed cases, the escrow holder won't release funds without mutual written agreement from both parties or a court order. These situations can drag on for weeks. Prevention: Use a clear, state-approved purchase agreement with well-defined contingency terms.

Earnest Money in FSBO Sales

FSBO sellers sometimes worry buyers won't take them seriously without an agent. Earnest money is your protection against this. A buyer who puts down $8,000 in earnest money on your $400,000 home is as committed as any buyer working through an agent.

How to handle it in a FSBO transaction:

1. Use a state-approved purchase agreement that clearly defines:

• The EMD amount
• Where it will be held (title company name)
• Deposit timeline (when funds must be received)
• Contingency terms and deadlines

1. Specify your title company upfront. Choose one before you list. When an offer comes in, you can direct the buyer's agent or buyer directly to your title company to wire the deposit.

1. Confirm receipt in writing. Once the title company confirms they've received the EMD, send the buyer a written acknowledgment. This creates a clean record.

1. SkipCommission provides the contract templates that handle all of this — including EMD language, contingency terms, and escrow instructions. You're not writing these from scratch.

FAQ

Q: Can a buyer offer $0 in earnest money? A: Yes, and some do in certain situations (cash buyers in competitive markets sometimes skip it). But as a seller, you're not required to accept an offer without earnest money. An offer with zero EMD carries more risk — the buyer has no skin in the game.

Q: What if the earnest money check bounces? A: This is a major red flag. A bounced EMD check signals either financial problems or bad faith. You're within your rights to decline to proceed with the transaction until cleared funds are received.

Q: Is earnest money taxable? A: When earnest money is credited to the buyer's down payment at closing, it's part of the normal sale transaction — no separate tax treatment. If you keep forfeited earnest money, it's generally treated as ordinary income to you and should be reported on your taxes.

Q: How do I get the earnest money if the buyer backs out? A: Both parties must sign a mutual release form, or you go through mediation/legal channels. Your purchase agreement should specify the dispute resolution process. Most legitimate title companies won't release funds to either party without written mutual consent.

Internal links: How to Negotiate a Home Sale Without an Agent | What Contracts Do You Need to Sell a House? | Closing Costs for Sellers Explained

CTA: Get FSBO contract templates that handle earnest money, contingencies, and more — included with your $499 listing. → Start Your Listing