Your earnest money is protected by dates, not dollars

Quick answer: Earnest money is a good-faith deposit, usually a small percentage of the price, held by a neutral third party and credited to you at closing. You get it back if you cancel for a reason your contract allows, in writing, before the deadline. You can lose it if you cancel for any other reason or miss a date.

What it is and who holds it

Earnest money tells the seller you're serious. Once they accept your offer, they take the house off the market for a few weeks. The deposit is your proof that you won't waste that time.

You don't hand the money to the seller. A title company, an escrow company or a real estate brokerage's trust account holds it, depending on where you live. The contract names the holder. At closing, the deposit is applied toward your down payment or closing costs. It isn't an extra fee. It's money you were going to pay anyway, just paid early.

How much to put down

No law sets the number. Local custom does, and it varies by state and county. Some markets use a flat figure. Others use a percentage of the price. Your agent will know what's normal and what's competitive where you're buying.

Worked example, not market data: say you offer $350,000 and the deposit is 2 percent. That's $7,000. If the seller has three offers on the table, you might see a buyer put down more to look stronger. If the house has sat for two months, you might put down less.

A bigger deposit makes your offer look better. It doesn't make your position safer. That's the part people miss. You're not risking more because you put more down. You're risking more because you didn't protect yourself with the right contract terms. A large deposit with solid contingencies and tracked deadlines is safe. A small deposit with a missed deadline can still cost you every dollar of it.

Don't stretch to a number that would hurt to lose. If the deposit is bigger than you can afford to see disappear, the offer is too aggressive for your budget. The same logic runs through the bank will approve you for too much house.

When it's due

The contract sets the deadline. Many contracts give you a few business days after both sides sign. Read the exact wording. Miss it, and the seller may have grounds to cancel the deal or to say you're in default before you've even had an inspection.

Pay it the way the contract says. That usually means a wire or a cashier's check delivered to the holder. Two cautions:

• Wire fraud is real. Scammers send fake wiring instructions that look like they came from the title company. Call the company at a number you found yourself, not one in the email, and confirm the instructions before you send a dollar.
• Get a receipt. The holder should confirm in writing that the deposit arrived. Keep it with your contract.

What protects it: contingencies and their dates

A contingency is a clause that lets you cancel and get your deposit back if a specific thing goes wrong. The common ones:

• Inspection. You can cancel or renegotiate based on what the inspector finds.
• Financing. You can cancel if you can't get the loan on the terms in the contract.
• Appraisal. You may have a way out if the house appraises below the price.
• Title. You can cancel if a problem with ownership turns up and isn't cleared.
• Sale of your current home. Rarer, and sellers don't like it.

Every one of these has a deadline, and the deadline is the protection. Once it passes, the contingency is usually gone. Your contract's wording controls, and it differs by state and by form.

A scene that plays out more than people admit: a buyer has a ten-day inspection window. The report comes back on day eight with a foundation concern. The inspector recommends a structural engineer. The engineer can't come until day twelve. The buyer figures the clock will sort itself out. It doesn't. Day ten passes with no written extension and no written notice, and the buyer's right to walk away on inspection grounds may be gone. Now cancelling could put the deposit at risk. In this example it's $7,000.

The fix costs nothing. Before the deadline, ask in writing for an extension through an addendum that both sides sign. Your agent drafts it. The seller may say no, but if they do, you know where you stand while you can still act. Silence is the expensive option.

More on that window in the home inspection is your last cheap exit.

When the seller keeps it

Generally, the seller can claim the deposit when the buyer breaks the contract without a contractual right to do so. The usual ways it happens:

• You back out after your contingencies expired because you got cold feet, found a different house or changed your mind.
• You miss a deadline and lose a contingency you needed.
• You don't deliver the deposit on time.
• You can't close because you took on new debt, changed jobs or did something else that sank your loan approval. Lenders recheck before closing.
• You fail to close on the date and don't have an agreed extension.

Many contracts include a "liquidated damages" clause. It says the seller's remedy for your default is to keep the deposit and nothing more. That's the best case for a buyer. Other contracts leave the seller free to sue for actual losses, or to demand that you close. Find out which kind you signed before you sign it, not after. A licensed real estate attorney can read it in a short appointment, and it's cheap insurance.

Sellers can also lose out. If the seller backs out without a valid reason, you may be able to recover your deposit and possibly more, depending on the contract and your state. A deposit doesn't bind only the buyer.

When both sides claim it

If you and the seller disagree about who gets the money, the holder usually won't pick a winner. Most won't release the funds without both signatures on a release form or a court order. That can freeze the deposit for weeks or months. Most disputes get settled with a negotiated split, because litigating over a few thousand dollars costs more than it's worth. Better to avoid the fight with clean paperwork from the start.

Before you sign

• Find the deposit amount, deadline and holder in the contract. Write the date on your calendar.
• List every contingency and its deadline. Set a reminder two days before each one.
• Confirm wiring instructions by phone using a number you looked up yourself.
• Ask your agent to explain the default clause in plain English. Ask whether the seller's remedy is limited to the deposit.
• Get written confirmation that the deposit was received.
• If you need more time on anything, ask for it in writing before the deadline, never after.

Good agents track these dates for you. Busy ones lose track. The questions that separate a good agent from a busy one covers how to tell the difference before you've put money down.

Laws, forms and customs on deposits vary by state and county, and every contract is different. This is general education, not legal, tax or financial advice. Before you act, check with a licensed real estate attorney, your lender or a licensed agent in your area.

Nobody at the closing table cares about your money the way you do. Know your dates.