Early in your home purchase you will write a check called earnest money, and many first-time buyers are not sure what it is or whether it is safe. Let me explain what an earnest money deposit does, who holds it, and how to make sure it is protected.
Written by Adam L. Engel, Esq., Principal and real estate attorney at Prime Title & Escrow
The earnest money deposit is one of the first real commitments you make as a buyer, so it is worth understanding before you hand over a dime. The good news is that it is not money lost. In the normal course it comes right back to you at closing as part of your purchase.
An earnest money deposit is a sum you put down with your offer to show the seller you mean it. A neutral party holds it in escrow during the transaction, and in most cases it is credited toward your cash to close at settlement. It is at risk only if you walk away without a valid reason allowed by your contract.
Why sellers want it
When a seller accepts your offer, they take the home off the market and stop entertaining other buyers. Earnest money is your good faith assurance that you intend to follow through. A reasonable deposit makes your offer more credible, which can matter in a competitive situation, because it signals you are unlikely to walk away on a whim.
Who holds the money
Your earnest money does not go to the seller. It is held in escrow by a neutral party, usually the listing broker or the settlement agent named in the contract. The holder keeps it in a separate escrow account and is bound by escrow rules, which means it cannot simply be handed to one side. It stays put until closing or until the contract tells the holder how it should be released.
How it comes back to you
In the typical purchase, your deposit is credited toward your cash to close at settlement. So if you put down earnest money early, that amount reduces what you need to bring on closing day. You can see exactly where it lands in your cash to close breakdown. It is not an extra cost, it is a prepayment of part of what you owe.
Your earnest money is on the line only if you back out without a valid reason under your contract. Most Virginia purchase contracts include contingencies, such as financing, inspection, and appraisal, that let you cancel and recover your deposit if you follow the contract’s requirements and deadlines. Walk away outside those terms, and the deposit may be at stake. This is one more reason to read your contract closely and ask me about anything that is unclear.
How much to put down
There is no single right number. The amount is negotiable and often a modest percentage of the purchase price, large enough to show commitment without putting more at risk than you are comfortable with. A bigger deposit can strengthen your offer, but it also means more money is in play if something goes wrong, so balance the two.
Protecting your deposit
Two habits keep your earnest money safe. First, understand your contingencies and their deadlines, so you preserve your right to cancel if you need it. Second, when you send the deposit, verify the instructions the same way you would verify any wiring instruction, by confirming with a known phone number, since fraud can target this transfer too, as I explain in sending funds safely.
It also helps to keep a record of when and how you sent the deposit and to whom, so there is never any question about where your money went. A quick confirmation that the holder received it gives you a clean paper trail from the very first payment in your purchase.
Handled correctly, earnest money is simply an early piece of your purchase that comes back to you at the end. If you have questions about how your deposit is being held or what your contingencies allow, that is exactly the kind of thing I am glad to walk through across Virginia and West Virginia.
Send me your contract and I will explain how your deposit is held, what your contingencies allow, and how it credits at closing.
Get Your Free Quoteor call (703) 552-4155Frequently asked questions
What is an earnest money deposit?
An earnest money deposit is a sum you put down with your offer to show the seller you are serious about buying. It is held in escrow by a neutral party and, in most cases, credited toward your cash to close at settlement.
Who holds the earnest money in Virginia?
A neutral party holds it in an escrow account, usually the listing broker or the settlement agent named in the contract. The holder is bound by escrow rules and cannot simply release the funds to one side without the proper basis.
Is my earnest money credited at closing?
Yes, in the typical case. At settlement your earnest money is applied toward your cash to close, so it reduces the amount you need to bring. You can see how it fits into the total in your cash to close breakdown.
Can I lose my earnest money?
You can, if you back out of the contract without a valid reason allowed by its terms. If you cancel under a contingency the contract provides, such as financing, inspection, or appraisal, and you follow the contract’s requirements, your deposit is generally returned.
How much earnest money should I put down?
There is no fixed rule. The amount is negotiable and often a small percentage of the purchase price, enough to show the seller you are committed. A stronger deposit can make your offer more competitive, but it also puts more at stake if you default.
This article is general information about earnest money deposits in Virginia and West Virginia. It is not legal or financial advice for your specific transaction, and how your deposit is held and released depends on your contract. Please review your contract and confirm the details with me directly.