How to Calculate Earnest Money — Step by Step

The formula, in one paragraph

Earnest money is a deposit paid with the offer on a home, held in escrow, and credited toward the down payment at closing. The formula is one multiplication: earnest money equals the home price times the earnest percent divided by 100. The down payment is the same shape: home price times the down percent divided by 100. The cash still due at closing is the down payment minus the earnest money. That is the whole calculation.

Step 1: Start with the home price

Start with the price you are offering, not the listing price: a higher offer needs a bigger deposit. The example in this guide uses a $400,000 home.

Step 2: Pick the earnest percent

Earnest money is typically 1 to 3 percent of the price. One percent is the low end, three percent is the high end, and two percent is the middle. In a competitive market a buyer may offer more to stand out: five percent is above the usual range, and it puts more money at risk. The example uses 2 percent.

Step 3: Multiply the price by the percent

Multiply the price by the percent and divide by 100. On a $400,000 home at 2 percent, the earnest money is $400,000 times 2 divided by 100, which is $8,000. At 1 percent it is $4,000, and at 3 percent it is $12,000. On a $500,000 home at 2 percent it is $10,000, and on a $750,000 home it is $15,000. The deposit grows with the price, dollar for dollar.

Step 4: Work out the down payment

Work out the down payment the same way. At 20 percent down on a $400,000 home, the down payment is $400,000 times 20 divided by 100, which is $80,000. The earnest money is $8,000 divided by $80,000 times 100, which is 10 percent of the down payment. The cash still due at closing is $80,000 minus $8,000, which is $72,000. The earnest money is not an extra cost: it is the first part of the down payment, paid early.

When the down payment is small

The share moves with the size of the down payment. At 3.5 percent down on a $400,000 home, the down payment is only $14,000, so the same $8,000 of earnest money is 57.14 percent of it, and only $6,000 is still due at closing. At 10 percent down the down payment is $40,000, so the $8,000 is 20 percent of it, with $32,000 still due. At 25 percent down the down payment is $100,000, so the $8,000 is 8 percent of it, with $92,000 still due. The earnest money is the same dollars either way; the share moves.

Working backwards from the deposit

The formula also runs backwards. The price for $10,000 of earnest money at 2 percent is $500,000. The earnest rate for $5,000 on a $400,000 home is 1.25 percent. The price for $12,000 at 3 percent is $400,000, and the price for $20,000 at 1.5 percent is $1,333,333.33. Divide the deposit by the percent to find the price; divide the deposit by the price to find the percent.

When the deposit is at risk

The deposit is held in escrow, and the purchase contract says when it comes back. If the deal falls through for a reason a contingency covers, the inspection, the appraisal, or the financing, the money usually comes back. If you walk away for a reason no contingency covers, the seller may keep it. That is why the contingencies matter more than the percent: a 1 percent deposit with no inspection contingency is riskier than a 3 percent deposit with one. Read them before you sign.

What NOT to do

Do not treat the earnest money as an extra cost on top of the down payment: it is credited toward it, so the cash still due at closing is the down payment minus the deposit. Do not offer a deposit you cannot afford to lose. Do not skip the contingencies to make an offer stronger without knowing what you are giving up. And do not forget the closing costs, which are separate from the down payment.

That box is the whole formula.