What Is Earnest Money When Buying a Home?

An earnest money deposit is money a homebuyer submits with a purchase offer to show serious intent to buy a property.

Most Chicago buyers deposit 1% to 3% of the purchase price when submitting an offer. The money stays in escrow until closing and later becomes part of the buyer’s down payment.

This guide explains what earnest money is, how much to deposit, when it is refundable, and how it works during a Chicago home purchase.

 

 

Earnest Money Definition

Earnest money is a good-faith deposit a homebuyer submits with a purchase offer to show serious intent to purchase a property. The deposit is usually 1% to 3% of the purchase price and is held in escrow until the transaction closes.

If the sale closes, the earnest money becomes part of the buyer’s down payment or closing costs. If the buyer cancels the contract without a valid contingency, the seller may keep the deposit.

 

 

 

 

What Is Earnest Money in Real Estate?

Earnest money is a deposit that shows a buyer intends to complete a home purchase.

Buyers submit the deposit with their purchase offer. A neutral third party holds the funds in an escrow account until the transaction closes.

If the purchase closes, the deposit becomes part of the buyer’s down payment. If the buyer cancels without a contractual reason, the seller may keep the deposit.

Earnest money helps establish trust between buyers and sellers. It shows the buyer is financially prepared to move forward with the transaction.

 

Example:

Suppose you offer $400,000 for a Chicago condo.

You include $6,000 in earnest money with the offer. If the transaction closes, the $6,000 becomes part of your down payment.

 

 

Why Do Homebuyers Pay Earnest Money?

Earnest money shows the seller that the buyer is serious about completing the purchase.

When a seller accepts an offer, they usually stop marketing the home and reject other buyers. The earnest money deposit protects the seller if the buyer cancels without a valid reason.

Earnest money helps buyers:

• Show serious intent to buy the property

• Demonstrate financial readiness

• Strengthen their offer in competitive markets

• Commit to the contract terms

 

Example:

Two buyers submit offers for the same Chicago condo.

One buyer includes $2,000 in earnest money.

The other offers $10,000.

The larger deposit signals stronger commitment and may make that offer more attractive to the seller.

 

 

How Much Earnest Money Do You Need?

Most earnest money deposits range from 1% to 3% of the purchase price.

The exact amount is negotiable between the buyer and seller. The right deposit depends on the home price, market conditions, and seller expectations.

A deposit should be large enough to show serious intent but not so large that it strains the buyer’s finances.

 

Example:

If you offer $400,000 for a home:

 

In competitive housing markets, buyers sometimes increase the deposit to strengthen their offer. 

 

 

Who Holds the Earnest Money Deposit?

Earnest money is held by a neutral third party known as the escrow agent.

Common escrow holders include:

• Title companies

• Real estate attorneys

• Real estate brokerages

The escrow agent keeps the funds in a secure account until closing or contract cancellation.

 

Chicago practice:

Chicago real estate contracts typically require two earnest money deposits.

The initial deposit is paid when the contract is signed.

The final deposit is paid after the attorney review and inspection period.

Example structure:

• Initial earnest money: $2,000

• Final earnest money: $4,000

• Total earnest money: $6,000

 

 

How Does Earnest Money Work When Buying a Home?

Earnest money follows a predictable process during a home purchase.

 

How earnest money works in a typical Chicago home purchase 

 

Example

Purchase price: $400,000

Loan amount: $388,000

Down payment: $12,000

Earnest money: $6,000

At closing, the $6,000 earnest money becomes half of the buyer’s down payment.

 

 

When Is Earnest Money Refundable?

Earnest money is refundable if the buyer cancels the contract under a valid contingency.

Common contingencies include:

• Home inspection contingency

• Mortgage financing contingency

• Attorney review period

• Appraisal contingency

If the buyer cancels during one of these periods, the escrow agent usually returns the deposit.

 

Chicago example

You submit a $2,000 earnest money deposit when offering to buy a condo.

During the attorney review period, your attorney discovers serious financial problems with the building.

You cancel the contract within the allowed review period.

The escrow agent returns your $2,000 deposit.

However, if a buyer cancels without a valid contractual reason, the seller may keep the deposit.

 

 

Why Do Mortgage Lenders Verify Earnest Money?

Mortgage lenders verify earnest money because the deposit becomes part of the buyer’s down payment.

Lenders must confirm that down payment funds come from an acceptable source and belong to the borrower.

To verify earnest money, lenders usually request:

• The signed purchase contract

• Earnest money check or wire confirmation

• Bank statement showing the funds cleared

These documents help prevent fraud and confirm the borrower can afford the purchase.

Earnest money can also come from gift funds from an acceptable donor if properly documented.

 

 

Where Is Earnest Money Listed in the Chicago Purchase Contract?

In the Chicago Association of Realtors purchase contract, earnest money appears on page 1 in Section 4.

This section outlines:

• The initial earnest money deposit

• The final earnest money deposit

• The escrow agent holding the funds

• Payment deadlines

Buyers should review the Real Estate Sales Contract carefully with their real estate agent or attorney before signing it.

 

 

Get Pre-approved to Purchase a Home in Chicago?

Before submitting an offer, it helps to know exactly how much you can afford.

Get your mortgage pre-approval letter through NewCastle Home Loans, so you can submit a stronger offer when you find the perfect home.

 

 

 

• Fannie Mae: Earnest Money Guidelines
• Freddie Mac: What is earnest money?