Quick Answer
Earnest money is a good-faith deposit a buyer submits with an offer to show they're serious about buying the home. It's held in escrow by a neutral third party — usually a title company — and credited toward your down payment and closing costs at closing. It is not an extra cost; it's money you were already going to pay, just paid earlier.
- Also called
- Good-faith deposit
- Typical amount
- Often ~1% of purchase price
- Who holds it
- Title company or escrow agent
- Refundable?
- Yes, if you cancel within a valid contingency
- Applied to
- Your down payment and closing costs
Earnest money is one of the first real dollars a buyer puts on the table, and it's one of the terms that most worries first-time buyers. The good news: in a normal transaction you never actually lose it — it simply becomes part of what you were already paying at closing.
How It Works
When your offer is accepted, you deliver the earnest money (usually within a few days, as specified in the purchase agreement) to a neutral third party — typically the title company handling the closing. They hold it in an escrow account. Neither you nor the seller can touch it while the deal is pending.
At closing, the deposit is credited to you. If your earnest money was $3,000, you bring $3,000 less to the closing table. Nothing is lost.
How Much Should You Offer in Indiana?
There's no legally required amount — it's negotiable. In Central Indiana it commonly lands around 1% of the purchase price, though it varies with price point and how competitive the situation is. On a hot listing, a larger deposit is one way to signal seriousness without raising your price.
Offering more increases your risk only if you default outside your contingencies. Offering very little can make an otherwise strong offer look soft to a seller weighing multiple bids.
When Do You Get It Back?
This is what actually matters, and it comes down to your contingencies. If you cancel for a reason your contract protects — the inspection turns up problems you won't accept, financing falls through, the appraisal comes in low — and you do it within the stated deadline, your earnest money is returned.
You risk losing it when you walk away for a reason not covered by a contingency, or after a deadline has passed. This is precisely why waiving contingencies to win a bidding war is a genuine financial risk, not a formality.
Common Mistakes
- Missing the delivery deadline. The contract specifies when the deposit is due. Late delivery can put you in breach.
- Assuming deadlines are flexible. Inspection and financing deadlines are firm dates. Once they pass, that protection is gone.
- Paying the seller directly. Earnest money goes to a neutral escrow holder, never to the seller.
- Waiving contingencies without understanding the exposure. Each one you remove converts a refundable deposit into an at-risk one.
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Frequently Asked Questions — Earnest money
How much earnest money is required in Indiana?
There is no legally required amount; it is negotiable between buyer and seller. In Central Indiana it commonly lands around 1% of the purchase price, though it varies by price point and how competitive the situation is. A larger deposit can strengthen an offer without raising the price.
Do I lose my earnest money if the deal falls through?
Not if you cancel for a reason your contract protects and you do it within the stated deadline. Inspection, financing, and appraisal contingencies all allow you to withdraw and have the deposit returned. You risk losing it if you walk away for a reason not covered by a contingency, or after a deadline has passed.
Is earnest money the same as a down payment?
No. Earnest money is a deposit that accompanies your offer, while the down payment is the portion of the purchase price you pay at closing. However, your earnest money is credited toward your down payment and closing costs, so it is not an additional cost.