Earnest money, sometimes called good faith money, is an essential part of an offer to purchase real estate. It’s essentially a deposit that tells a seller that you are serious—or earnest—about wanting to buy their home. If you’ve ever bought or sold real estate, you’re probably already familiar with the term. What you may not know, however, is what happens to that earnest money check once you hand it over to your real estate agent.

When is the earnest money check cashed?

Once your offer is accepted, the earnest money check is usually deposited into an escrow account, where it is held until closing. That money is collateral that guarantees your promise to purchase the house. So before you write that check, make sure you have the funds available to cover it, as it will be cashed within a few days of your offer being accepted. As long as everything goes off without a hitch, that amount is applied toward your down payment or other closing costs. It’s sort of like prepaying part of your closing costs. There will be a section on the closing statement that specifies the earnest money amount and shows it being applied to closing costs.

What happens if the sale falls through?

Do you just lose out on that earnest money, or will you get a refund? Simply put, as long as you, the buyer, aren’t at fault for the sale being canceled, you’ll get your earnest money back. For instance, let’s say the sale of the home is contingent upon a satisfactory home inspection, and the inspection report comes back with one or more issues that the seller says they won’t repair. In a case like that, you’re more than welcome to back out of the sale without fear of losing your earnest money deposit. If you decide to back out of the sale for a reason not spelled out in the terms of the purchase agreement, then the seller will more than likely get to keep that earnest money.

Why isn’t the check just cashed at closing when other closing costs are paid?

Earnest money needs to be held by a neutral third party, usually an escrow or trust account, for the sake of fairness and transparency. Otherwise, a less honest buyer could just call their bank and stop payment on the check when the seller is legally entitled to keep the funds.