Definition
Earnest money is a deposit a buyer puts down when signing a purchase contract to demonstrate they're serious about following through. It's held in escrow and later credited toward the purchase price at closing, rather than being a separate additional cost. If the buyer backs out for a reason that isn't protected by a contingency in the contract, the seller may be entitled to keep the deposit as compensation. For a homeowner evaluating offers, the size of the earnest money deposit is a useful signal — a buyer willing to put more money at risk is usually more committed to closing. It's not a guarantee the sale will happen, but it does add a real financial consequence if the buyer walks away without cause. Understanding how and when you're entitled to keep it can also protect you if a deal falls apart late in the process.
Example
When a buyer named Josh signed a $265,000 contract to purchase Sandra's home, he included a $5,000 earnest money deposit as a show of good faith. The funds went straight into the title company's escrow account within three days of signing, exactly as the contract required. Sandra felt more confident moving forward with repairs and paperwork knowing Josh had real money on the line if he backed out without cause. She still kept her house ready to show to backup buyers for the first week just in case his financing fell through during underwriting. At closing six weeks later, that $5,000 deposit appeared as a credit on Josh's side of the settlement statement, simply reducing the additional funds he needed to wire in.