When a buyer makes an offer on a home and the seller accepts, the buyer is typically required to put down a deposit shortly after the contract is signed. This deposit is called earnest money.
Earnest money is one of those real estate terms that sounds more complicated than it is. This guide explains exactly what it is, how it is handled, what happens to it at closing, and the circumstances under which it is refundable or forfeited.
What earnest money is
Earnest money — sometimes called a good-faith deposit — is a sum of money the buyer deposits after a purchase contract is signed to demonstrate to the seller that they are serious about completing the purchase.
When a seller accepts an offer, they take their property off the market and stop showing it to other buyers. They are making a commitment based on the buyer’s promise to follow through. Earnest money gives the seller some financial assurance that the buyer is genuinely committed. If the buyer backs out of the transaction without a valid contractual reason, the seller may have the right to keep the earnest money as compensation for the time the property was off the market.
Earnest money is not a fee paid to any service provider. It is not a cost of the transaction in the same way that closing costs are. If the sale closes, the earnest money is credited toward the buyer’s funds due at closing — it becomes part of the down payment or is applied toward closing costs.
How much earnest money is typical in Arizona
There is no law in Arizona that sets a required amount for earnest money. The amount is negotiated between the buyer and seller and written into the purchase contract.
In Arizona, earnest money is commonly 1 to 3 percent of the purchase price, though the amount varies depending on the property, the market, and what the parties agree to. On a $350,000 home, a 1 percent earnest money deposit would be $3,500. A 2 percent deposit on the same home would be $7,000.
In competitive markets, buyers sometimes offer a larger earnest money deposit to make their offer more attractive to the seller. A higher deposit signals stronger commitment. In less competitive situations, a smaller deposit may be acceptable.
When earnest money is due
The purchase contract specifies when the earnest money must be deposited. In Arizona, this is commonly within one to three business days of the contract being accepted and signed by both parties. The exact deadline is written into the contract, and failing to deposit the earnest money on time can constitute a breach of the contract.
Who holds the earnest money
In Arizona, earnest money is deposited with a neutral third party — typically the title or escrow company named in the purchase contract. The escrow company holds the funds in a trust account and does not release them to either the buyer or the seller while the transaction is in progress.
The funds are held according to the written instructions in the purchase contract. They are released only when the transaction closes, when both parties agree in writing to release them, or when a dispute is resolved through the contract’s dispute process, mediation, or a court order.
For a full explanation of what an escrow company does, see our guide: What is escrow, and what does it do?
What happens to earnest money at closing
If the transaction closes successfully, the earnest money held in escrow is credited to the buyer at closing. It is applied toward the funds the buyer owes at closing — typically the down payment, closing costs, or both. The buyer does not receive the earnest money back as a separate payment. It simply reduces the amount the buyer needs to bring to closing.
When earnest money is refundable
Whether earnest money is refundable depends entirely on the terms of the purchase contract — specifically, the contingencies included in that contract and whether the deadlines attached to those contingencies were followed.
A contingency is a condition written into the contract that must be satisfied for the transaction to move forward. If a contingency is not met and the buyer cancels within the timeframe the contract allows, the earnest money is generally refundable. Common contingencies in Arizona purchase contracts include the following.
The inspection contingency gives the buyer a defined period — commonly 10 days in Arizona — to have the property inspected and to cancel the contract if the findings are unacceptable. If the buyer cancels in writing within the inspection period, the earnest money is generally returned.
The financing contingency protects the buyer if their mortgage loan is not approved. If the lender is unable to approve the loan within the timeframe stated in the contract, and the buyer cancels within that window, the earnest money is generally refundable.
The appraisal contingency protects the buyer if the property appraises below the purchase price. If the appraised value comes in lower than the agreed price and the buyer cancels within the timeframe the contract allows, the earnest money is generally returned.
The key requirement in all of these situations is that the buyer must act within the timeframe specified in the contract and must provide the required written notice. Missing a deadline — even by a single day — can affect the buyer’s right to a refund.
When earnest money is not refundable
Earnest money is at risk when a buyer cancels a transaction for a reason that is not covered by a contingency in the contract, or when a buyer misses a contingency deadline.
Common situations in which a buyer may forfeit earnest money include canceling the contract after the inspection period has expired without a valid reason under another contingency, failing to provide a written cancellation notice within the required timeframe, backing out after all contingencies have been removed, or failing to close on the agreed closing date without contractual justification.
It is also possible for a buyer to negotiate a contract that includes non-refundable earnest money, meaning the deposit is forfeited to the seller regardless of the reason the transaction does not close. This type of arrangement is not the norm in standard residential transactions but can be negotiated.
What happens when there is a dispute over earnest money
If the buyer and seller disagree about who is entitled to the earnest money, the escrow company will not release the funds to either party without written authorization from both, or a court order directing the release.
In Arizona, purchase contracts typically include a dispute resolution process — often requiring mediation before either party can pursue litigation. Until the dispute is resolved, the funds remain held in the escrow trust account.
The difference between earnest money and a down payment
Earnest money and a down payment are two different things, though they are often confused.
Earnest money is a deposit made shortly after the contract is signed, held in escrow, and credited toward the buyer’s costs at closing. It is typically a small percentage of the purchase price.
A down payment is the portion of the purchase price the buyer pays in cash at closing, as distinct from the amount financed through a mortgage loan. The down payment is due at closing, not at contract signing.
If the transaction closes, the earnest money becomes part of the funds applied at closing — in many cases, it is counted as part of the down payment. But the two are separate in timing, purpose, and the rules that govern them.
Frequently asked questions
Is earnest money required to buy a home in Arizona? Arizona law does not require a buyer to provide earnest money as a condition of making an offer. However, sellers commonly expect it, and a purchase contract can specify that earnest money is required. In practice, most residential transactions in Arizona include an earnest money deposit.
Can the seller spend the earnest money after it is deposited? No. In Arizona, earnest money held by a title or escrow company is kept in a trust account and is not accessible to the seller while the transaction is in progress. The seller does not receive the funds unless the transaction closes or a forfeiture is confirmed through the contract’s dispute process.
What happens if the seller cancels the contract? If the seller defaults on the contract — meaning they are unable or unwilling to complete the sale — the buyer is generally entitled to the return of their earnest money deposit. The buyer may also have additional remedies available under the contract.
Does earnest money count toward the purchase price? Not directly. Earnest money is credited to the buyer at closing and reduces the amount the buyer needs to bring to close. It is applied toward the down payment or closing costs, both of which are part of what the buyer contributes to the transaction. It does not reduce the agreed purchase price itself.
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