Earnest money is one of those transaction elements that seems simple on the surface. Buyer makes a deposit, escrow holds it, deposit gets applied at closing. What could go wrong?

As it turns out, quite a bit. In our experience, earnest money issues are among the most preventable causes of closing delays—yet they continue to trip up buyers, sellers, and even experienced agents. Let’s walk through the common pitfalls and how to avoid them.

What Earnest Money Actually Does

Before diving into what goes wrong, let’s establish what earnest money is supposed to accomplish. When a buyer submits an earnest money deposit—typically 1% to 3% of the purchase price—they’re demonstrating serious intent to complete the transaction. It’s a good faith gesture that tells the seller: “I’m committed enough to put money at risk.”

The deposit is held in a neutral escrow account until closing, at which point it’s credited toward the buyer’s down payment and closing costs. If the transaction falls through for reasons covered by contingencies, the buyer typically gets it back. If the buyer defaults without contingency protection, the seller may be entitled to keep it as liquidated damages.

Simple enough in theory. Here’s where practice gets complicated.

Pitfall #1: Late Delivery

Most purchase agreements specify that earnest money must be delivered within one to three business days of contract acceptance. This deadline is contractual—missing it can constitute a breach of contract, potentially allowing the seller to terminate the agreement.

We’ve seen closings threatened because buyers assumed they had more time, forgot about the deadline during the excitement of getting an accepted offer, or ran into banking delays when trying to wire funds.

The fix: Prepare your earnest money before you make an offer. Know exactly where the funds are coming from and how you’ll deliver them. If you’re wiring funds, understand your bank’s procedures and timing. Don’t wait until the last day of your deadline.

Pitfall #2: Sourcing and Documentation Issues

Here’s where earnest money intersects with loan underwriting. Lenders need to verify the source of your down payment funds, and your earnest money is part of that picture. Large, unexplained deposits in your bank account raise red flags that can delay loan approval.

Common scenarios that create problems:

• Receiving a gift from family members without proper gift letter documentation
• Transferring funds between accounts right before making the deposit
• Using funds from a source that’s difficult to document (cash savings, cryptocurrency conversions, etc.)
• Having someone else write the earnest money check on your behalf

The fix: Keep your earnest money in a clearly documented account for at least 60 days before you need it. If you’re receiving gift funds, coordinate with your lender on proper documentation before the money moves. Communicate with your loan officer about any unusual circumstances.

Pitfall #3: Check Problems

Personal checks are commonly accepted for earnest money deposits, but they come with risks. Checks can bounce due to insufficient funds, account holds, or fraud prevention measures. When an earnest money check doesn’t clear, it creates complications that can jeopardize the entire transaction.

The fix: Consider using a cashier’s check or wire transfer, especially for larger deposits. If you do write a personal check, ensure the funds are fully available (not pending from recent deposits) and that there are no holds on your account.

Pitfall #4: Contingency Deadline Confusion

Earnest money refundability is directly tied to contingency periods. If you decide to cancel within your inspection period, you should receive your earnest money back. But miss that deadline by even a day, and you may lose your refund rights.

We regularly see buyers who thought they had until a certain date, miscounted business days vs. calendar days, or didn’t realize their contingency expired when they failed to take a required action (like delivering an inspection response).

The fix: Calendar every contingency deadline the moment you sign the purchase agreement. Set reminders several days before each deadline. When in doubt, ask your agent or escrow officer to confirm the exact date and time.

Pitfall #5: Disbursement Disputes

When transactions fall apart, earnest money often becomes a point of contention. The buyer believes they’re entitled to a refund; the seller believes they’re entitled to keep it. As the escrow holder, we’re caught in the middle—and we cannot release disputed funds without mutual written instructions or a court order.

This creates a situation where the earnest money sits frozen, sometimes for months, while the parties negotiate or litigate. Meanwhile, both parties are frustrated, and the funds are unavailable to either.

The fix: Understand your contract terms clearly before you sign. Know what triggers your contingency protections and what happens if you cancel outside of those protections. If a dispute arises, work toward resolution quickly—protracted disagreements benefit no one.

Pitfall #6: Wrong Recipient

Wire fraud is a serious threat in real estate transactions. Criminals hack email accounts, monitor transaction communications, and send fraudulent wiring instructions that appear to come from legitimate sources. Buyers who wire earnest money to the wrong account may never recover those funds.

The fix: Always verify wiring instructions by calling a known, verified phone number—not a number from an email. Never wire funds based solely on email instructions. If wiring instructions change mid-transaction, treat it as a major red flag and verify through multiple channels.

Best Practices for Smooth Earnest Money Handling

After years of closing transactions, here’s what we recommend:

• Be proactive: Have your earnest money ready before you make offers
• Be precise: Know your deadlines and meet them with time to spare
• Be documented: Keep clear records of fund sources and transfers
• Be cautious: Verify all wiring instructions through trusted channels
• Be communicative: Ask questions when anything is unclear

Earnest money doesn’t have to be a source of closing delays. With proper preparation and attention to detail, it’s simply an early step in your journey to homeownership.

Questions about earnest money requirements or procedures? Contact our escrow team—we’re here to help your transaction proceed smoothly.