How the Earnest Money Calculator works
Earnest money is a good-faith deposit a homebuyer puts down shortly after a seller accepts their offer. It signals that the buyer is serious about the purchase and gives the seller some compensation if the buyer walks away without a valid contractual reason. The deposit is held by a neutral third party — usually a title company, escrow agent, or brokerage — until closing, at which point it is applied toward the buyer's costs.
The formula
The calculation is simple: Earnest Money = Purchase Price × Deposit Percentage. The deposit percentage itself is negotiated between buyer and seller (or set by local custom) rather than fixed by any regulation. Most conventional purchases use 1% to 3% of the purchase price; in competitive markets buyers sometimes offer 5% or more to make an offer stand out.
Worked example
Take a $400,000 home with a 2% earnest money deposit: 400,000 × 0.02 = $8,000. If the buyer plans an $80,000 down payment (20%) and expects $8,000 in other closing costs, the $8,000 deposit is credited toward that total at closing. That leaves $72,000 of down payment still due, and total cash due at closing — down payment plus closing costs minus the deposit already paid — of $80,000 ($80,000 + $8,000 − $8,000).
What moves the deposit amount
- Purchase price: the deposit scales directly with price — a higher-priced home means a larger dollar deposit at the same percentage.
- Deposit percentage: set by negotiation and market conditions. Buyer's markets often see lower deposits (1% or less); competitive seller's markets often see higher ones (3%-10%).
- Down payment size: a larger planned down payment means the same deposit covers a smaller share of it, leaving more down payment due at closing.
What happens to the deposit
Purchase contracts typically include contingencies — financing, home inspection, and appraisal are the most common — that let a buyer cancel and get the deposit refunded within a set window. If the buyer backs out after those contingency periods expire, or breaches the contract without a valid reason, the seller may be entitled to keep the deposit as liquidated damages. If the sale closes normally, the deposit is simply credited toward the buyer's down payment or closing costs, reducing the cash needed at the closing table. Contract terms vary by state and by the specific purchase agreement, so treat this calculator as an arithmetic estimate, not legal guidance.