Buying a House FAQ
What's the "earnest money deposit" on a home purchase?
4. What's the "earnest money deposit" on a home purchase?
To show that an offer is serious and made in good faith, it's traditional for the prospective home buyer to accompany it with a check for a modest amount -- often a small percentage of the purchase price -- known as an "earnest money deposit." The amount of the earnest money deposit varies by state, but is typically in the range of 1-2% of the purchase price.
The seller can't rush out and cash this check right away -- in fact, the check should be made out to the escrow company, not the seller. But the seller may get to keep the money if you pull out of the deal for a reason that wasn't allowed under the purchase contract -- for example, if you simply change your mind, or perhaps get lazy about taking steps to finalize your loan, as opposed to legitimately refusing to remove the inspection contingency after inspections revealed dry rot.
Having a deposit on hold acts as a disincentive against buyers who file frivolous offers, and ultimately compensates a seller who has to put a house back on the market. As a practical matter (and under the terms of the standard real estate contract), however, the escrow company can't turn the money over to the seller without both the buyer and seller agreeing to allow that. Take a look at your contract before you sign it to make sure you're satisfied with how it disposes of the earnest money in the event of a dispute.
If the deal goes ahead as planned, the earnest money is normally applied toward your down payment.