Earnest Money Contract: How They Work
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What is an Earnest Money Contract?
An earnest money contract is a legally binding document between parties made during the exchange of the earnest money. Earnest money is a monetary deposit made by the buyer in a home loan or real property transaction, and it’s typically held in escrow by a third party. Generally, the earnest money can be anywhere between 1-10% of the sale price. The earnest money contract generally sets the conditions for refunding the deposited amount.
Here is an article on earnest payments.
How Earnest Money Contracts Work
Earnest money protects the seller if the buyer backs out of a sale. An earnest money contract protects both parties by setting terms and conditions of the earnest money refund. It also provides remedies for both parties in case of a breach of contract or dispute.
Generally earnest money contracts contain crucial information pertaining to the sale and the exchange of the earnest money–such as contingencies, timeline of exchange, refund process, escrow agent, etc.
Here are some examples of how earnest money works.
Key Terms in an Earnest Money Contract
Earnest money contracts set the terms and conditions of refunding the deposited earnest money and provides remedies in case of breach of the contract. Here are some of the key terms you are likely to encounter in an earnest money contract:
- Buyer and seller details: An earnest money contract will contain the information about the buyer and the seller to establish the parties that are entering the agreement.
- Escrow agent information: The earnest money is generally held by an escrow agent agreed to by the parties involved in an escrow account . The escrow agent can be the seller’s attorney, the real estate agent or an agent of the title company or a third party, although it is important that the escrow agent be able to act impartially. In case of a breach, the escrow agent may return the amount to the seller and in case of a dispute the escrow agent might hold the earnest money till the dispute has been resolved.
- Amount of deposit: There is no rule about how much earnest money has to be. Generally, this ranges from 1-10% of the sale price. The earnest deposit contract will note the amount of the deposit being held.
- Property details: The earnest money contract will also contain information about the property being sold. It may also note the purchase price, representations and warranties, financing, mortgage note , title insurance , closing costs , lead-based paint disclosure and other relevant details of the sale, although these details may instead be included in a separate purchase agreement instead.
Contingencies:
Contingencies are an important part of earnest money contracts. These contingencies provide buyer protection by ensuring refund of the earnest money in case of certain special events. Here are some common contingencies used in earnest money contracts:
- Mortgage contingency clause: A mortgage contingency clause can be used when the buyer is purchasing real estate through a mortgage. This clause would ensure that if the buyer is unable to secure mortgage and complete the sale, the earnest money deposit will still be returned to the buyer.
- Inspection clause: An inspection clause allows the buyer to have certain amount of time to conduct home inspection for any issues. If the home fails this inspection and the buyer backs out of the sale, the earnest money can still be returned to the buyer if the inspection clause has been added to the earnest money contract.
- Appraisal contingency: An appraisal contingency allows earnest money refund in case that the appraisal, or appraised value, of the real estate is lower than the sale price.
- A contingency for selling an existing home: A contingency for selling an existing home makes the sale contract contingent on the sale of a current home. If the current home doesn’t sell and the sale doesn’t go through, this type of contingency still allows for earned money refund.
If you would like to learn more about contingencies in an earnest money contract, here is an article.
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Can I Get My Earnest Money Back?
Earnest money contracts have contingencies that protect both the seller and the buyer. In case a sale goes through, earnest money is generally refundable. Contingencies set out more terms under which even if the sale doesn’t go through, the earnest money is refundable.
However, if the buyer backs out or the sale is incomplete due to reasons not set under contingencies in the contract, the seller can forfeit the earnest money.
Here are some ways you can protect your earnest money.
What Happens to Earnest Money at Closing?
If the appraisal is completed and both the buyer and the seller is happy with the price and the inspection is completed without trouble, the buyer and seller move to closing. At closing, the buyer pays the seller and receives the rights to the property. At this time, the escrow agent will pay the buyer the earnest money which was being held in escrow. Sometimes, depending on how the earnest money was paid, it will be applied towards closing costs or down payment.
In cases where the buyer secures a loan with no down payment, the earnest money will just be applied to closing costs. The surplus will be paid back to the buyer. In cases where the earnest money deposit is not paid in cash and instead using other assets such as a watch, car, boat, real estate, etc., it might be returned to the buyer or liquidated and then applied to closing costs and down payment.
Here is an article on escrow money at closing.
Get Help With an Earnest Money Contract
Do you have any questions about an earnest money contract and want to speak to an expert? Post a project today on ContractsCounsel and receive bids from real estate lawyers who specialize in contracts.
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Meet some of our Earnest Money Contract Lawyers
Sara S.
With over eleven years of intellectual property experience, I’m happy to work on your contract problem. I am very diligent and enjoy meeting tight deadlines. Drafting memoranda, business transactional documents, termination notices, demand letters, licenses and letter agreements are all in my wheelhouse! Working in a variety of fields, from construction to pharmaceutical, I enjoy resolving any disputes that come across my desk. I will prioritize your project, big or small. Please be ready and prepared with all relevant documentation so we can get started as soon as you click HIRE! Hourly rate projects will be billed hourly in accordance with the timesheet. Flat rate projects will be billed in segments. Choosing an hourly or flat rate is up to you. Absolutely no refunds.
"Sara was very helpful with the matter and we will work with her again."
David L.
Experienced real estate, business, and tax practitioner, representing start up and established businesses with formation, contracts, and operational issues.
"David was professional, knowledgeable, and incredibly helpful, he made the entire process smooth and stress free."
Donya G.
Donya G.
I am a New York and Connecticut–licensed contracts attorney with over 25 years of legal and business experience. I focus on drafting, reviewing, and negotiating commercial agreements, advising small businesses and international brokerage firms — particularly in eCommerce acquisitions. My practice includes asset purchase agreements, master services agreements, operating agreements, employment agreements, and a broad range of commercial contracts, as well as merchant services defense, breach of contract matters and arbitration. I have served as General Counsel to small businesses, a Vice President at an investment bank, a Civil Court Arbitrator and Hearing Officer, and a Judicial Clerk to a Civil Court Judge. My combined legal and business background enables me to deliver practical, strategic counsel tailored to each client’s objectives.
"Donya was an amazing partner and was very patient and diligent in dealing with the APA and OA. I highly recommend her as she knows her stuff, is confident, and always has your back."
Matt B.
Matt practices law in the areas of commercial finance, contract law, business & corporate law, and residential and commercial real estate (with a particular emphasis on retail shopping centers and office buildings). He has extensive experience in negotiating and structuring complex commercial loan, asset acquisition, asset disposition, leasing and real estate transactions. Matt additionally works on various general matters for clients such as forming LLCs and corporations, preparing various LLC and corporation documents and drafting and reviewing various types of contracts and agreements for clients and providing advice regarding same. Matt provides clients with extensive and timely communication on their matters and ensures that his clients are well represented and highly satisfied with their legal representation and the work product provided. Matt offers all potential clients a free initial consultation to discuss their legal matters prior to engaging his firm to represent them. Prior to opening his law firm Matt worked for many years in the New York City office of a large international law firm where he counseled large multi-national businesses, financial institutions, investment groups and individuals on highly sophisticated business, financial and real estate transactions. Matt provides his clients with diligent legal representation on their matters with a very personal approach.
"Mr Bales is a true professional. Great representation and will use his services again. Jim"
Gina O.
see resume.
September 8, 2023
Matthew K.
I am a seasoned attorney specializing in data privacy, information security, and intellectual property law, with over 19 years of experience. As a Certified Information Privacy Professional, I provide strategic legal counsel to organizations navigating the complexities of data protection, compliance, and technology transactions. My extensive background includes working with both public and private sector clients, contributing to academia as a subject matter expert, and serving in leadership roles within influential legal organizations. This combination of practical, academic, and leadership experience enables me to deliver tailored solutions that align with business objectives and mitigate legal risks. Expertise: I have a proven track record of drafting, negotiating, and advising on a wide range of agreements and legal documentation, including: Data Law & Privacy: - Privacy Policies compliant with GDPR, CCPA, and other regulations - Information Security Policies and Documentation - Data Processing Agreements (DPAs) - Incident Response Plans and Data Breach Protocols - eDiscovery Protocols and Legal Hold Documentation Technology Transactions: - Software Development Agreements (including Mobile Apps) - SaaS and Subscription Agreements - IP Licensing and Royalty Agreements - Technology Outsourcing and Cloud Service Agreements Corporate & Commercial Agreements: - Master Services Agreements (MSAs) - Joint Venture Agreements - Non-Disclosure and Confidentiality Agreements - Real Estate Purchase & Sale Agreements - Loan Agreements and Financial Documentation Employment & Operations: - Employee Handbooks and Workplace Policies - Employment Contracts - Supply Chain and Logistics Agreements Creative & Digital Content: - Sponsorship Agreements - Digital Creator and Influencer Agreements - E-Commerce Terms & Conditions My approach is centered on delivering results that protect my clients' interests while facilitating innovation and growth. Whether advising startups, established corporations, or creative professionals, I leverage my deep understanding of data-driven industries to craft agreements that address current needs and anticipate future challenges. If you’re seeking a responsive, detail-oriented legal partner with a focus on data law and cutting-edge technology, I’d be delighted to assist with your next project.
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Connie M.
Copyright, trademark, and intellectual property contracts and licenses. General Business contracts. Practical and comprehensive advice and contract drafting in an efficient, no-nonsense manner. She routinely represents clients needing copyright, trademark, and intellectual property contracts and licenses in the book publishing industry, music publishing, and all aspects of art and entertainment. She has represented both sides of the table - creators and authors and corporations and businesses. After 40 years of experience she has seen most business models and structures and has worked with many general contracts in different industries.
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