What Is Earnest Money in New Construction?

Earnest money is a deposit you pay when signing a purchase agreement to show you are serious about buying the home. In new construction, it typically ranges from 1% to 5% of the purchase price.

The Short Answer

Earnest money (also called a good faith deposit) is an upfront payment you make when you sign a purchase agreement for a new construction home. It shows the builder you intend to follow through with the purchase.

If the deal closes as planned, the earnest money is applied toward your purchase price. If you cancel, you may lose some or all of it.

How Much Is Typical?

Earnest money deposits for new construction are often larger than for resale homes. While a resale transaction might require 1-2% of the purchase price, builder contracts may require 3-5% or more.

Some builders collect the deposit in stages: an initial deposit at signing, then additional deposits at milestones like lot selection or design center appointments.

On a $400,000 home, a 3% earnest money deposit is $12,000. A 5% deposit is $20,000. These are significant amounts of money at risk.

Where Does the Money Go?

Earnest money is typically held by the builder, a title company, or an escrow agent. The specifics should be spelled out in your purchase agreement.

In some states, the law requires that earnest money be held in a separate escrow account. In others, the builder may hold it in their general operating account.

Ask where your deposit will be held before you pay it. Money held by an independent third party (like a title company) is generally safer than money held directly by the builder.

What Happens If the Deal Falls Through?

Most builder contracts include a deposit forfeiture clause. If you fail to close for any reason not covered by a contingency, the builder keeps your entire deposit as "liquidated damages."

Some contracts allow the builder to keep your deposit AND sue you for additional damages. Others limit the builder's remedy to the deposit amount only.

If the builder cancels (due to permitting issues, construction problems, etc.), you should get your deposit back — but read the fine print carefully.

How to Protect Your Deposit

Read the deposit forfeiture clause before you sign. Understand exactly what triggers forfeiture.

Ask if any portion of the deposit is refundable under any circumstances.

Make sure you understand all contingencies (financing, inspection, appraisal) and their deadlines.

Get the refund conditions in writing. Verbal promises from the sales agent are not enforceable.

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