Millennial Home Buying 101: What's the Deal with Earnest Money?

For millennials new to the home buying process, one of the many hoops you'll find when putting in your dream home offer is called "earnest money."

Let us break down what earnest money is, how it works, and how it can be used to make your offer stand out (and protect your money) to land your dream home!

What is Earnest Money?

Earnest money is just a deposit made to a neutral third party bank account ("escrow") to show that you have (at least some of) the cash and are serious about buying the house. It signals you're willing to put your money where your mouth is and can help distinguish you apart from other buyers.

It shows the seller you’re serious about buying and willing to put some skin in the game while the deal moves through inspections, financing, and closing.

Typically this amount is between 1 and 3% of the home’s purchase price (higher in competitive markets). So if you're making an offer on a $500,000 home, an earnest money offer of $5,000 - $15,000 might be reasonable.

If you go through with the purchase, the money is applied to your down payment or closing costs.

If you back out without a valid reason, the seller keeps the money as compensation for lost time and potential buyers.

Earnest money can improve your offer, but also carries risk as detailed below.

Why does Earnest Money Improve Your Offer?

Imagine yourself on the other end of this deal- if you've ever posted something to Facebook Marketplace you'll know how much time and energy goes into selling something (like your old couch).

There are A LOT of flakey buyers our there. Of course that's not you- so earnest money can be a way to signal to the seller that:

✔️ You’re a Serious Buyer – Sellers don’t want to accept an offer, take their home off the market, and then have the deal fall apart. A strong earnest money deposit proves you’re committed.

✔️ The Seller has Little Risk – If a buyer backs out for no valid reason, the seller keeps the earnest money to make up for lost time and missed opportunities.

✔️ You are Financially Stable and Can "Walk the Walk" – Buyers who put down a sizable earnest deposit are seen as more financially prepared, which reduces the risk of financing falling through later.

Earnest money can make your offer stand out in a hot home market, but be aware of the risks and ways that this could set you back in the home buying journey.

How Could I Lose My Earnest Money?

Naturally, you're asking the question- this sounds like a scam, right?

It's not a scam, but you should definitely be aware and learn from the ways others have lost their earnest money.

The most common reasons buyers can lose their earnest money are:

1️⃣ Missing a Deadline ⏳📑

Real estate contracts have strict deadlines for inspections, financing, appraisals, and closing. If you miss one, the seller can cancel the deal and keep your earnest money.

Example: You forget to schedule your home inspection within the contingency period, and the deadline expires. Now, you can’t back out due to major issues without losing your deposit.

How to Avoid It:

✔ Set calendar reminders for every deadline in your contract.

✔ Work closely with your agent & lender to stay on schedule.

✔ If you need more time, request an extension in writing before the deadline.

2️⃣ Backing Out Without a Valid Contingency 🚫🏠

Earnest money is refundable only if you back out for a reason covered by contingencies (like inspection or financing issues). If you get cold feet and walk away, the seller keeps your deposit.

Example: You find another home you like better and decide to switch—but there’s no contingency for this in your contract. The seller gets to keep your earnest money as compensation.

How to Avoid It:

✔ Be 100% sure before making an offer.

✔ Use contingencies (inspection, appraisal, financing) to protect yourself.

✔ Understand what reasons allow you to back out—and which don’t!

3️⃣ Waiving Contingencies in a Hot Market🔥

Some buyers waive contingencies (like inspection or financing) to make their offer more competitive—but this is risky. If something goes wrong, you can’t back out without losing your money.

Example: You waive the inspection contingency, later discover foundation issues, and now have no way to cancel without losing your deposit.

How to Avoid It:

✔ If you waive an inspection, do a pre-offer walk-through with an inspector for a quick assessment.

✔ Use a short contingency period instead of waiving it entirely.

✔ Only waive contingencies if you’re 100% confident about the home!

4️⃣ Financing Falls Through After the Contingency 🏦🚫

If you have a financing contingency, you’re protected until it expires. But if your mortgage gets denied after the deadline, you’re stuck without a way to exit—and the seller can keep your earnest money.

Example: You get pre-approved, but before closing, your credit score drops due to a new car loan. Your lender denies your mortgage, and because the financing contingency already expired, you lose your deposit.

How to Avoid It:

✔ Keep your finances stable—don’t open new credit lines or make big purchases before closing!

✔ Request a financing contingency extension if your loan is taking longer than expected.

✔ Have a backup lender option in case issues arise.

5️⃣ Appraisal Comes in Low, and You Can’t Cover the Difference 🏠📉

If a home appraises lower than your offer price, the lender won’t finance the full amount, and you’ll have to pay the difference in cash. If you can’t, and you don’t have an appraisal contingency, the seller keeps your earnest money when you back out.

Example: You offer $400K, but the home appraises for $380K. Your lender will only loan you up to $380K, meaning you need $20K extra in cash to close. If you can’t afford it and don’t have an appraisal contingency, you lose your earnest money.

How to Avoid It:

✔ Include an appraisal contingency so you can renegotiate or back out without penalty.

✔ Have extra funds available in case of a low appraisal.

✔ Negotiate with the seller to lower the price if the appraisal is too low.

6️⃣ Failing to Perform on the Contract 📝⚠️

If you don’t follow through on contract terms, the seller can cancel the deal and keep your earnest money. This includes:

• Delaying closing beyond the agreed date

• Not submitting required paperwork

• Ignoring HOA restrictions

  
  

Example: Your contract states that you must provide proof of home insurance within 5 days, but you forget. The seller terminates the deal and keeps your deposit.

How to Avoid It:

✔ Carefully review your contract terms and obligations.

✔ Work with your agent to ensure all requirements are met.

✔ Request extensions in writing if you need more time.

Earnest Money May be Your Secret Weapon—Use It Wisely! 💰🏡

At the end of the day, earnest money can make your offer stand out in a competitive market, proving to the seller that you’re serious and financially ready to buy their home. But while it’s a powerful tool, it’s also real money on the line, and the last thing you want is to lose it due to a missed deadline or unexpected issue.

The best way to protect your earnest money is to have your team (agent, lender, and attorney) fully aligned on the terms of your offer.

Before you submit that deposit, make sure everyone is on the same page about contingencies, deadlines, and financing so there are no surprises along the way.

Bottom line? Earnest money helps you stand out—but only if you protect it. Stay informed, communicate with your team, and you’ll be in a great position to close on your dream home without losing a dime! 🚀🔑

Here at BuyWise Home, our mission is to empower millennial purchasing decisions with comprehensive home information, ensuring every step you take towards home ownership is confident and informed.

We hope you consider the BuyWise Home and Neighborhood Due Diligence report to streamline the home buying process for you.

This comprehensive report includes a radon risk assessment as well as several other aspects of necessary home research including:

• Other environmental risk assessments (flood, hurricane, wildfire, tornado, and other climate change hazards)

• Human Health Hazards (cancer index, air quality index, lead paint index, nearby hazardous sites)

• Crime (sex offenders, local crime hotspots, violent crime incidents)

•  Internet Speed

• Access to shopping/groceries

• Access to entertainment, gyms, coffee shops, nail salons and other lifestyle amenities

• Home owner association reviews

• School/daycare system access and quality

• Property maps and images

• Historical property record search (tax, deed, and liens)

🚀 Happy Home Hunting! 🏡

             BuyWise Home