Does Earnest Money Go Towards Closing Costs?
When purchasing a home, buyers are often required to put down an earnest money deposit (EMD) as a sign of good faith. But a common question arises: Does earnest money go towards closing costs? The answer is yes—but there’s more to it than a simple yes or no. In this guide, we’ll break down how earnest money works, how it applies to your final home purchase costs, and what buyers need to know to maximize their investment.
What Is Earnest Money?
Earnest money is a good-faith deposit made by the buyer to show the seller that they are serious about purchasing the property. This deposit is typically 1% to 3% of the home’s purchase price, but it can be higher in competitive markets.
The money is held in an escrow account managed by a neutral third party—such as a title company, real estate brokerage, or attorney—until closing. If the deal goes through, the earnest money is credited towards the buyer’s costs. If the deal falls through, whether the buyer gets their money back depends on the terms of the contract.
How Earnest Money Applies to Closing Costs
Yes, earnest money does go toward closing costs—but it can also be applied to other expenses related to the purchase. Here’s how it works:
1. Closing Costs
Earnest money is often credited toward the buyer’s closing costs, which can include:
Loan origination fees
Appraisal fees
Title insurance
Escrow fees
Recording fees
2. Down Payment
In some cases, buyers choose to apply their earnest money toward the down payment rather than closing costs. Since both are upfront costs of buying a home, the buyer can decide where the funds are best used.
3. Prepaid Expenses
Some home purchases require prepaid expenses like property taxes, homeowner’s insurance, and HOA fees. Buyers may use their earnest money to cover these costs instead.
The way earnest money is applied depends on the terms of the purchase agreement and the lender’s guidelines.
Breaking Down Closing Costs: What Buyers Should Expect
Many first-time buyers are surprised at how much closing costs can add up. On average, closing costs range from 2% to 5% of the home’s purchase price. For a $300,000 home, that means closing costs could be $6,000 to $15,000.
Common Closing Costs for Buyers:
Lender Fees: Origination fees, underwriting, and credit checks.
Appraisal Fees: A required home valuation by the lender.
Title Services: Title search and insurance.
Escrow Fees: Fees for the escrow service managing the funds.
Recording Fees: Local government charges to document the purchase.
Prepaid Insurance & Taxes: Upfront payments for homeowners’ insurance and property taxes.
Earnest money reduces the amount you need to bring to closing by applying funds toward these expenses.
How Earnest Money Helps Buyers Save Money
While earnest money is not an additional cost, it provides several financial advantages for buyers:
1. Reduces Out-of-Pocket Closing Costs
Since earnest money is applied to closing costs or the down payment, buyers need to bring less cash to closing.
2. Strengthens Your Offer
In competitive markets, a higher earnest money deposit can make your offer more attractive to sellers.
3. Locks in the Deal
Sellers take their property off the market once they accept an offer with earnest money, reducing competition for the buyer.
What Happens If a Deal Falls Through?
If the deal does not close, what happens to the earnest money depends on the contract terms:
Buyers May Get Their Money Back If:
The home fails inspection and the buyer withdraws under the home inspection contingency.
The buyer can’t secure financing (if a financing contingency is in place).
The appraisal comes in low, and the buyer doesn’t want to cover the gap.
The seller backs out of the contract.
Buyers May Lose Their Earnest Money If:
They miss contract deadlines or fail to remove contingencies on time.
They back out of the deal for personal reasons (buyer’s remorse, finding another home, etc.).
They waive contingencies, making their deposit non-refundable.
Real-World Example: How Earnest Money Affects Closing Costs
Scenario 1: John Buys a Home with $10,000 Earnest Money
John’s total closing costs are $12,000.
His earnest money is applied to closing, reducing the amount he needs to bring to the table.
At closing, he only needs to bring $2,000 in additional funds.
Scenario 2: Emily’s Deal Falls Apart
Emily puts down $5,000 in earnest money.
Her mortgage loan is denied due to an unexpected credit score drop.
Since she had a financing contingency, she gets her earnest money back.
Scenario 3: Mike Waives Contingencies and Loses Earnest Money
Mike puts down $8,000 in earnest money.
He waives all contingencies to compete in a bidding war.
He later finds out the home has major plumbing issues and backs out.
Because he waived contingencies, the seller keeps his $8,000 deposit.
Final Thoughts: Smart Buyers Use Earnest Money Wisely
Yes, earnest money does go toward closing costs, but understanding how to protect and use it wisely is essential.
To make the most of your earnest money:
Always include contingencies to protect your deposit.
Understand your lender’s requirements for applying funds.
Keep track of all contract deadlines.
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