Letting cash slip through your fingers is exceptionally painful when you could have prevented the loss. Sadly, too many buyers pay scant attention to what happens to their earnest money if their home purchase goes haywire. Avoid that fate by understanding the mechanics of earnest money.

“Earnest money is essentially a good-faith deposit,” says Justin Park, a real estate attorney at Romero Park & Wiggins in Bellevue, Wash. “Sellers want you to put something down to commit to the sale because once they’ve signed the purchase agreement, they’ve effectively taken their property off the market — but they have no guarantee you’ll close. The earnest money is supposed to be that guarantee.”

The amount of your deposit is negotiable. “Generally, it bears some relation to the purchase price, and the general rule is 1 percent,” explains Nancy Polomis, a real estate partner at the Hellmuth & Johnson law firm in Eden Prairie, Minn. “In this market, all bets are off. You might be able to get sellers to accept less.”

The less you commit as earnest money, the better. “The less money you put down,” says John Elias, a real estate attorney and principal at John L. Elias & Associates in Chicago, “the less desire there is for sellers to fight over it.”

It’s also smart to apply a small deposit because if you fail to perform according your contract’s contingencies, you forfeit those funds. Common contingencies relate to financing, inspections and the sale of your current home. “If you don’t perform because you’re exercising a contingency, you get your earnest money back because the deal is off,” says Polomis. “But if you don’t exercise your contingencies by the dates set in the contract, the earnest money ‘goes hard,’ or becomes nonrefundable.”

To properly exercise contingencies, know exactly what your contract requires. “For each contingency, make certain you understand what happens if it’s exercised,” recommends Park. “Do you get your earnest money back? What steps must you take to get it back? What happens to the interest on the money?”

Your earnest money is also in jeopardy if your contract doesn’t include a contingency addressing a problem that later arises, as one of Park’s clients learned the hard way. “The buyer purchased a high-end condo in a project that wasn’t going to be done for two years and put down a big chunk of money — $50,000,” explains Park. “The contract explained what would happen if there was a financing contingency, but nowhere did it say there was a financing contingency.” Though the buyer had prequalified for a loan, she couldn’t qualify when it came time to close. In litigation over the hefty deposit, the judge ruled against the buyer. “She now has no condo and no $50,000,” laments Park.

The best way to protect your earnest money is to follow your contract. “If you’re in a state that uses lawyers in real estate transactions, make sure your lawyer is keeping track of your contract’s deadlines,” advises Elias. “If you’re in a state where lawyers aren’t regularly used, you need to know what your contract says so you comply with the requirements to extend and exercise contingencies.”