In real estate earnest money is a deposit made to a seller showing the buyer’s "good faith" in a real estate transaction. Some state laws state that real estate contracts must contain a consideration to be valid. This amount could be as low as a dollar.

When a buyer makes an offer to buy residential real estate, he/she generally signs a contract and deposits an amount in escrow, acceptable to the seller by way of earnest money.

The amount varies enormously (between $1 and 50% of purchase price), depending upon local custom and the state of the local market at the time of contract negotiations. On most residential standard purchases, 2% of purchase price is acceptable.

If the seller accepts the offer, the earnest money is held in escrow by the real estate broker, real Estate attorney, settlement or title company until closing and is then applied to the buyer's portion of the remaining costs.

If the offer is rejected, the earnest money is usually returned, since no binding contract has been entered into.

If the buyer retracts the offer or does not fulfill its obligations under the contract (on an executed contract), the earnest money is forfeited. Therefore, it is generally in the seller's best interest to see as high an earnest money deposit as possible.

The only time the earnest money is lost to the buyer is when the buyer pulls out of the real estate transaction in a way that wasn't specified in the real estate purchase contract. Stipulations and/or contingencies can be put on the real estate contract, such as making the offer is contingent upon getting approved for a home loan, and should the offer fail for those reasons, the earnest money would be returned.