Earnest Money vs. Due Diligence in Real Estate: Key Distinctions Buyers Should Know

Key Takeaways:
– Earnest money is a refundable deposit held in escrow to show you’re serious about buying.
– Due diligence fees are usually non-refundable payments made directly to the seller for inspection time.
– Both are typically credited toward the purchase price at closing if the sale goes through.
– knowing the difference helps protect your money and strengthens your negotiations as a buyer.

When buying a home, understanding earnest money vs. due diligence is key. Earnest money is a refundable deposit held in escrow to show your serious intent to buy, while due diligence fees are usually non-refundable payments made directly to the seller to secure time for inspections and evaluations. Understanding the difference helps protect your investment and strengthens your position during negotiations.

Whether you’re buying a home in Asheville, NC, Athens, GA, or Fayetteville, AR, this Redfin guide breaks down the comparison between earnest money and due diligence, why both are important, and what they mean for you as a buyer.

What is earnest money?

Earnest money is a payment a buyer makes to show commitment to buying the property. Instead of going directly to the seller, it’s usually held in an escrow account and applied toward the purchase price at closing. 

The amount often ranges from 1% to 3% of the purchase price, giving the seller confidence in the deal  and discouraging the buyer from backing out without a valid reason. It’s usually paid after an offer is accepted and terms are agreed upon.

Is it refundable?

Earnest money refundability hinges on purchase agreement contingencies. Buyers typically recover funds if the contract fails due to covered issues (e.g., inspection, financing). However, if the buyer withdraws for uncovered reasons, the seller might retain the funds. Policies can vary by local laws and market customs.

>> Read: What Happens to Earnest Money as Closing?

What is due diligence?

After an offer is accepted, the transaction enters the due diligence period—the time between contract agreement and closing. This window allows the buyer to thoroughly investigate the property to confirm it meets their expectations, as well as any lender requirements.

During due diligence, buyers typically arrange home inspections and may also complete tasks such as:

• Reviewing the title and property records
• Ordering a property survey
• Conducting environmental assessments if needed
• Checking zoning regulations and restrictions

What is a due diligence fee and is it refundable??

A non-refundable due diligence fee, typically 0.1% to 0.5% of the purchase price, is paid by the buyer directly to the seller. It demonstrates buyer seriousness and compensates the seller for removing the home from the market during inspections. This fee is credited towards the purchase if the sale closes; otherwise, the seller keeps it. It’s distinct from earnest money and not universally required.

Earnest money vs. due diligence: a quick comparison

Why are they so important in real estate transactions?

These payments demonstrate commitment, build trust, and offer protection for both parties throughout the home-buying process.

Earnest money:

• Shows the buyer’s serious intent to purchase. A deposit signals that you’re committed and not just making an offer on a whim.
• Builds seller confidence. When a seller sees you’ve put down earnest money, they feel more secure moving forward and taking their home off the market.
• Provides financial protection to the seller if the buyer backs out without a valid reason. If you walk away for reasons not covered by contingencies, the seller can keep this deposit to offset lost time and potential costs.

Due diligence fees:

• Compensate the seller for taking the property off the market during the buyer’s inspection period. This fee acts as consideration for the seller’s risk in pausing showings and offers from other buyers.
• Give the buyer exclusive time to thoroughly inspect and evaluate the property. In return, you get a set period to arrange inspections, appraisals, and any other research needed to decide whether to move ahead with confidence.
• Can strengthen a buyer’s offer in a competitive market. Offering a due diligence fee shows you’re serious and willing to put money on the line, which can make your offer more appealing to sellers comparing multiple bids.

Buyer tips to navigate earnest money and due diligence fees

Understanding earnest money and due diligence fees can be confusing. To make the process easier, these helpful tips will guide throughout the process.

• Don’t skip the due diligence period: Use this time to thoroughly inspect the property and review all documents. It’s your chance to uncover potential issues before committing fully.
• Understand your contingencies: Make sure your purchase agreement clearly outlines conditions like inspections, financing, and appraisal. These protect your earnest money if problems arise.
• Know the local customs: Earnest money and due diligence fees vary by market. Ask your Redfin agent what’s typical in your area so you can make a competitive and appropriate offer.
• Keep your payments separate: Remember that earnest money and due diligence fees are different deposits with different rules. Know when and how to pay each.
• Work closely with your agent: Your Redfin real estate agent can guide you on negotiation strategies, deposit amounts, and timing—helping you avoid costly mistakes.

>> Read: 17 First-Time Homebuyer Mistakes to Consider and How to Avoid Them

FAQs on earnest money vs. due diligence

1. Can you negotiate earnest money and due diligence amounts?

Yes. Both are negotiable. Buyers can offer more to stand out or less in a slower market. Your agent can help you decide what’s appropriate and use it strategically.

2. Which comes first, earnest money or the due diligence fee?

Typically, earnest money is deposited in escrow after your offer is accepted. The due diligence fee is paid to the seller at the start of the inspection period. Timing can vary, so always check your contract and confirm with your agent.

3. What can I do if the seller unfairly keeps my earnest money deposit?

Review your contract and contingencies first. If the seller won’t return your earnest money without cause, contact a real estate attorney or use the dispute process in your agreement.

4. Are due diligence fees required in all U.S. real estate transactions?

No. Due diligence fees are common in some states like North Carolina but not required everywhere. Check local customs with your agent before offering.

5. Is it possible to lose both earnest money and due diligence fees when buying a home?

Yes. If you back out without valid contingencies, you can lose both deposits. Always understand your contract terms to avoid this.