Short answer
Earnest money is a deposit a buyer pays to show good faith. A cash buyer may or may not post one, depending on the contract. If the buyer cancels for a reason the contract allows, it is usually returned. If the buyer backs out without a valid reason, the seller may be entitled to keep it, depending on the agreement.
What earnest money is
The CFPB describes earnest money as a deposit a buyer pays to show good faith on a signed contract to buy a home. A third party such as a real estate agent or title company usually holds it. It is applied to the purchase price at closing.
It is not the same as a mortgage escrow account, which is the account a lender uses after closing to pay taxes and insurance. People mix the two up. They are unrelated.
What happens if the deal falls apart
If the contract is cancelled for a reason it permits, such as a contingency the buyer is allowed to use, the deposit generally goes back to the buyer. If the buyer simply fails to perform in good faith, the deposit may be forfeited to the seller. The exact answer sits in the agreement of sale. Some contracts say the deposit is the seller's only remedy, and others allow more.
In a cash deal, financing and appraisal contingencies usually do not exist because there is no lender. That can narrow the buyer's valid reasons to cancel. Inspection and title contingencies can still be there.
Do cash buyers always put money down?
Not always. Some cash buyers post a deposit when the contract is signed. Others rely on closing quickly and put little or nothing down. A large deposit is a sign the buyer is serious, and a small one is a smaller risk to them if they walk away.
If you are taking your house off the market for a buyer, ask what deposit they will post, who will hold it, and what happens to it if the buyer cancels. These are negotiable terms, and you should see them in writing before you sign.
Practical advice
Make sure the deposit is held by a title company or attorney, not handed to the other side. Keep a copy of the receipt. If you have a wholesale buyer, ask whether the deposit is real money from the buyer who will close, since Pennsylvania treats wholesale deals as a separate category under Act 52 of 2024.
Kaizen Home Buyers makes cash offers, buys as-is and charges no agent commission. For any question about deposits in our agreement, call 267-329-0084 and have your own attorney read the terms before you sign.
When the deposit is not the main protection
A deposit is only one layer of protection. Proof of funds, a reputable settlement agent, and a clear closing date matter just as much. A buyer with a small deposit and strong funds may be safer than one with a large deposit and no funds behind it.
Write down the deadlines. If the contract has an inspection period, note the last day and what the buyer must do to cancel. After that date, the deposit usually becomes harder for the buyer to recover.