Definition
The amount of money you deposit to demonstrate seriousness in making an offer. Earnest money is held in escrow and applied toward your down payment at closing.
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Earnest money typically ranges from 1-3% of the purchase price in normal markets, though it may be higher (3-5%) in competitive markets where sellers expect serious offers. The earnest money is deposited within a specified timeframe (typically 1-3 days) of the offer being accepted. It's held by a third party (escrow company or title company) and remains the buyer's money unless the buyer defaults without contingency protection.
Pro Tip
Higher earnest money makes your offer attractive, but ensure it's protected by contingencies.
Example
A buyer offers $400,000 for a home with $10,000 earnest money (2.5% of purchase price), which demonstrates seriousness while not committing excessive capital before knowing the home's condition.