What Is Earnest Money and How Much Do You Need?

If you’re buying a home—whether in Austin, Houston, or San Antonio—there’s one term you’ll hear almost immediately: earnest money. It’s not just another line item in your contract. Earnest money can make or break your offer, and it could determine whether your dream home slips through your fingers.

Most buyers understand down payments. Fewer understand earnest money deposits. And in a market where sellers want certainty, not knowing the difference could cost you the house. Let’s break it down.

What Is Earnest Money?

Earnest money—sometimes called a good faith deposit—is a sum you pay upfront when you make an offer on a home. It shows the seller that you’re serious. In Texas and across many parts of the country, earnest money is usually one to three percent of the purchase price, but the exact amount depends on the local market and what your contract spells out. It could be as high as 5-10%!

This money doesn’t just disappear into thin air. It sits in an escrow account managed by a title company, attorney or broker until the transaction closes. If everything goes smoothly, that deposit is credited towards the down payment or closing costs at closing.

Think of earnest money as the handshake that seals the deal: you’re putting your money where your mouth is. It tells the seller you’re not just shopping—you’re committed enough to tie up cash while the rest of the process plays out.

Earnest Money in Texas: How Much Is Enough?

In most Texas transactions, you’ll see deposits between one and three percent of the purchase price. For a $400,000 home in Houston, that means $4,000–$12,000. But this isn’t a hard-and-fast rule.

• In competitive Austin neighborhoods, like Zilker or Travis Heights, it’s not uncommon for buyers to put down five percent or more just to stand out.
• In more suburban or rural areas—think Katy or New Braunfels—sellers may be fine with a flat $2,000–$5,000 check.

Your real estate agent will help you gauge the right number for your situation, but here’s the key: too little, and sellers won’t take you seriously. Too much, and you risk tying up cash you may need elsewhere.

How Earnest Money Protects Both Sides

Sellers pull their homes off the market when they accept your offer. If you back out without a valid reason, they lose valuable time and exposure. Earnest money compensates them for that risk. Plus, generally speaking, if a home goes back on the market after a deal falls apart, buyers may assume the first buyer walked because of problems with the property—which can hurt the seller’s leverage and future market value.

But the protections go both ways. Your purchase contract will spell out contingencies that let you walk away and still recover your deposit. The most common are:

• Inspection contingency – If the home inspection uncovers serious issues (foundation cracks in San Antonio, roof damage from Houston storms), you can walk away or renegotiate.
• Appraisal contingency – If the property appraises lower than the amount specified in your appraisal contingency—which could be the contract price or a lower threshold you’re comfortable with—you’re not stuck paying the difference. How low you set that figure depends on the level of competition in the market.
• Financing contingency – If your lender can’t finalize your mortgage or denies you for your home loan, you’re not forced into default so long as you terminate before the financing contingency expires with proof that your lender denied you. While you’ve already applied and received a preapproval or prequalification letter, there’s still a lot that happens once you’re under contract—the property itself has to be underwritten, and this contingency gives you an out if the financing ultimately doesn’t come together (learn more about financing contingencies here).
• Home sale contingency – If you’re selling one house to buy another, this protects you if your first home doesn’t close on time.

These are not technicalities—they are lifelines. Without them, you could forfeit thousands of dollars.

When You Might Lose Your Earnest Money

Earnest money is refundable if you follow the contract. But there are ways to lose it:

• Missing the closing date. This is the most common reason buyers forfeit earnest money. If you can’t close on time, the seller may keep your deposit—which is why you need to work with a lender who can hit deadlines under any circumstance.
• Backing out for no reason. Cold feet is not a contingency. Change your mind, and that money likely stays with the seller.
• Waiving protections. In Austin’s 2021 boom, buyers sometimes waived appraisal or financing contingencies. That strategy is less common in 2025’s buyer-friendly market, but it still happens. Do it only if you can afford to lose your deposit. When an appraisal came in $200,000 less than the contract price (and yes, this happened often), some buyers were forced to give up their earnest money deposit because they didn’t have the cash to cover the gap. Remember: your loan amount is always based on the lesser of the purchase price and the appraised value.

Earnest Money vs. Option Money in Texas

Here’s where Texas is unique. Our contracts often include option money in addition to earnest money.

• Earnest money shows your overall commitment and is applied to your down payment or closing costs.
• Option money (usually a few hundred dollars) goes directly to the seller and isn’t applied to your down payment or closing costs. It pays for the right to back out during the option period—typically seven to ten days—without losing your earnest deposit.

Think of option money as a safety valve. If you decide the house isn’t right during inspections, you lose the option fee but keep your earnest money.

Earnest Money vs. Down Payment

Many buyers confuse earnest money with a down payment. Here’s the difference:

• Earnest money is a deposit to hold the contract and prevent the seller from entering into another agreement with a different buyer. It sits in escrow and gets credited back to you at closing.
• Down payment is permanent. It’s the equity portion of your home purchase—the cash you put toward the price of the home that isn’t covered by loan proceeds.

For example: On a $500,000 home in Austin with a 5% down payment, you’d owe $25,000 at closing. If you already put down $10,000 in earnest money, only $15,000 remains due.

Why Earnest Money Matters More in 2025

Buyers today, whether in Texas, North Carolina or Colorado, are in a different environment than they were just a few years ago. Inventory is higher, competition is cooler, and sellers are offering concessions. That means you may not need to risk non-refundable deposits the way buyers did during the frenzy of 2021–2022.

But earnest money still matters. Sellers want certainty. A buyer who includes a healthy earnest deposit signals seriousness, even in a slower market. And in Texas, where bidding wars can still erupt in hot pockets of Austin or Dallas suburbs like Celina, earnest money is one of the clearest ways to separate yourself from weaker offers.

Tips for Protecting Your Earnest Money

1. Always use an escrow account. Never hand a check directly to the seller.
2. Get everything in writing. Your contract should spell out contingencies, timelines, and what happens to your deposit in every scenario.
3. Know your deadlines. Inspections, appraisals, financing—all have dates. Miss them, and your deposit could be at risk.
4. Work with a trusted broker and agent. They’ll make sure your contract is airtight and your deposit is safe.

Final Thoughts: Earnest Money Is Your First Real Investment

For Texas buyers, earnest money is more than a formality. It’s your first investment in the home you’re buying. Done right, it strengthens your offer, protects your interests, and gives you leverage in negotiations. Done carelessly, it can cost you thousands.

At LendFriend, we help Texas buyers navigate every step of the mortgage process—from structuring your offer with the right earnest money deposit to comparing loan options that keep more money in your pocket. Whether you’re buying in Austin, Houston, Dallas, or anywhere in between, we’ll make sure your money works as hard as you do.