What is an earnest money deposit?
A deposit is the good-faith payment a buyer makes to the seller before signing the sale contract, to show intent to purchase a property.
When the sale closes, the deposit is subtracted from the total sale price; the remaining amount is paid at closing.
How large should the deposit be?
There is no fixed percentage set by law for the deposit; it is freely negotiated between the parties.
In practice, deposits between 5% and 10% of the sale price are common; the final rate depends on what the parties agree to.
What is the difference between a deposit and a security deposit?
A deposit is tied to a sale transaction, while a security deposit is typically collected in a rental relationship against potential damage or unpaid rent.
The two concepts belong to different legal relationships; the contract should clearly state which one applies.
What happens if one party backs out after the deposit is paid?
In many jurisdictions, an earnest money deposit works against whichever party withdraws: the buyer may forfeit the deposit, while a withdrawing seller may owe double the amount received.
The exact outcome depends on the contract terms and local law; getting legal advice before a binding decision is the safest approach.