How To Protect Your Earnest Money Deposit When Buying a Home

By DeVonna Meyer

DeVonna has spent over 43 years building lifelong relationships in South County and has sold hundreds of homes from San Jose, Morgan Hill, Gilroy, and Hollister Cities.

Many homebuyers are unaware that they can lose their earnest money deposit, and this mistake can cost thousands of dollars. Understanding how the earnest money deposit works is critical before making an offer. Today, I’ll break it down for you so you can avoid this costly mistake:

What is an earnest money deposit? An earnest money deposit (EMD) or good faith deposit shows the seller that the buyer is serious about purchasing the home. The deposit is usually around 1% to 3% of the purchase price. This means that on a $1 million home, that could be $10,000 to $30,000. The deposit is submitted at the time of the offer. Once the seller accepts, the money goes into an escrow account and is held there until the deal closes.

What happens to the deposit? Once the sale goes as planned, the deposit is applied to the buyer’s down payment or closing costs. Then, it becomes part of the overall funds needed to buy the home. If the buyer cancels the deal without a valid reason listed in the contract, the seller may keep the deposit because this is considered a breach of contract. The risk of losing the deposit is real and often misunderstood.

How to protect the deposit. The best way to protect the deposit is to include clear contingencies in the purchase agreement. Common contingencies include:

• Financing contingency: Allows the buyer to cancel if a loan is not approved
• Inspection contingency: Allows the buyer to walk away if the home inspection reveals major issues
• Appraisal contingency: Allows the buyer to exit the deal if the home is appraised for less than the offer price

Contingencies create legal reasons to exit the contract without penalty. If one of these issues arises and the contingency is active, the buyer can cancel the deal and recover the deposit.

Accepted forms of payment. Most escrow and title companies accept wire transfers or cashier’s checks. Cash, credit cards, and debit cards are not accepted. Always confirm payment instructions directly with the escrow company to avoid fraud.

An earnest money deposit is not a simple placeholder because it is a legally binding part of a real estate transaction. Buyers must understand how it works, how to protect it, and how to make the payment properly. Review all contract terms carefully to avoid any disputes and confusion, and don’t forget to include proper contingencies. Always work with professionals who understand the process. If you have any questions, feel free to call or text me at 408-547-4362 or email me at devonna.meyer@exprealty.com.