But what is earnest money? Earnest money is a deposit you pay to show the buyer you're serious about the transaction. Both the buyer and the seller want to make sure the deal goes through, and an earnest money deposit helps give the deal solid footing. It's important to understand what earnest money is and how it can affect your transaction when buying a home.

Is earnest money a legal requirement to buy a home?

No. But money talks and deposits keep buyers from changing their minds.

How much money do you need?

Earnest money amounts vary by area and can range from 1% of the home purchase price to 5%,depending on the type of home you're purchasing.

Are deposits ever nonrefundable?

Real estate contracts dictate timelines and responsibilities for both buyers and sellers. Buyers risk losing their deposit when they don't comply with the contract's terms, and sellers lose valuable marketing time.

How are disputes handled?

If a deal closes within the contract's timeline and you're able to provide documentation, you'll likely get your money back or, depending on the agreement, it will be applied as a credit toward the purchase price of the home. But every situation is different, and issues can and do arise.

Who gets to keep the money?

One of three scenarios will occur: The buyer has refunded the money because of failed contingencies; the deposit is applied to the purchase price or refunded to the buyer when the sale closes, or the seller receives the deposit because the buyer backed out of the deal for reasons not covered in the contract.

Is it ever fair to forfeit a deposit?

If you back out of the agreement for reasons not covered under your contingency agreement, you may not get your deposit back. Be sure you fully understand how failed contingencies affect both you and the seller to avoid confusion and heartbreak later on.

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Information obtained from Trulia