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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Daehoon P.
Daehoon P.
Corporate, M&A & Securities Lawyer | Managing Attorney, DP Counsel PLLC Practice Areas: Business Formation | Commercial Contracts | Contract Drafting & Review | Mergers & Acquisitions | Venture Capital | Securities Offerings | Franchise Law | Employment & Equity Compensation | Intellectual Property | Cross-Border Transactions About/Bio: I represent companies, investors, and fund sponsors in corporate transactions, commercial contracting, and private securities matters, from entity formation and early-stage financings to acquisitions, exits, and ongoing strategic counsel. As Managing Attorney of DP Counsel PLLC, I help clients structure transactions clearly, allocate risk thoughtfully, and move deals forward with documentation that is practical, enforceable, and aligned with business objectives. My practice includes both day-to-day commercial matters and more complex transactional work, including venture financings, private offerings, M&A deals, fund-related documents, and cross-border structuring. What I Do: Corporate & Commercial • Entity formation and structuring for corporations, LLCs, and limited partnerships • Operating agreements, shareholder agreements, and governance documents • Commercial contract drafting, review, and negotiation • Vendor, distribution, manufacturing, SaaS, and licensing agreements • Employment, consulting, confidentiality, and equity compensation agreements • Outside general counsel support for growing companies Securities & Private Capital • Private offerings under Regulation D and Regulation S • Private placement memoranda, subscription agreements, and investor documents • SAFE, convertible note, and priced equity financings • Venture capital and private fund formation matters • Fund governing documents and offering document packages • Securities law analysis for private capital raising transactions Mergers & Acquisitions • Letters of intent and term sheets • Stock purchase, asset purchase, and merger agreements • Due diligence coordination and transaction support • Disclosure schedules, closing documents, and post-closing matters • Earnouts, rollover equity, indemnity structures, and related deal terms • HSR, CFIUS, and related regulatory issue spotting for qualifying transactions Digital Assets & Emerging Technologies • Federal-law digital asset and token securities analysis • Entity structuring for blockchain and Web3 ventures • Digital asset fund and operating structures • AML/KYC documentation support and regulatory issue spotting Franchising • Franchise Disclosure Documents (FDDs) • Franchise agreements • Master franchise and area development agreements • Franchise structuring and registration coordination Real Estate Transactions • Commercial real estate acquisitions and dispositions • Real estate joint ventures and syndications • Commercial lease drafting and negotiation • Real estate investment structures and related offering documents Cross-Border & International • U.S. market entry and entity structuring for international clients • Delaware and multi-entity holding structures • Cross-border transaction planning and documentation • Coordination with foreign counsel and tax advisors on cross-border matters Why Clients Hire Me: • Big-law-level drafting with boutique responsiveness • Practical, business-focused advice grounded in execution reality • Clear scoping and transparent fee arrangements • Experience across financings, acquisitions, fund formations, and cross-border transactions Typical Projects: • Contract drafting and negotiation • Entity formation and governance packages • Private offering document suites • Venture financing documentation • M&A transactions from LOI through closing • Fractional or outside general counsel support Industries Technology | SaaS | FinTech | Digital Assets | E-commerce | Healthcare | Real Estate | Food & Beverage | Professional Services
"Thanks Daehoon for going above and beyond and helping me with a lot of detailed information regarding signing multiple contracts. I was very happy with the outcome. Best"
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."
Dolan W.
You need a lawyer who's more than just knowledgeable – you need someone who's on your side. That's where I come in. I'll be there every step of the way, offering clear communication and proactive solutions. Whether you're starting a business or navigating a complex legal matter, I'll help you make informed decisions and achieve your goals. I also have drafted many templates to save you money. Just use this link - https://www.contractscounsel.com/client/lawyer-profile/3764#Templates Why Choose Me? I put you first I'm proactive I'm efficient I'm accessible
"Very happy with Dolan's work. Quick response and very much to the point."
Moss S.
Over 30 years of experience practicing commercial real estate and complex business litigation law.
"Moss S was responsive and attentive to my needs and completed the task ahead of time and within budget"
November 17, 2021
Harrison K.
Harrison Kordestani is an executive with over twenty-five years experience in entertainment and media, energy, technologies, and start-ups. Mr. Kordestani has also developed a specialized legal and strategic consulting practice representing select entertainment, oil and gas, mortgage lending, and technology start-up clientele. He is also deeply passionate about new technologies and has also actively worked in building companies in the video-on-demand, wearable tech, information of things, demand prediction and app-marketing spaces. As an attorney, Mr. Kordestani's focus has been on transactional drafting and negotiation and providing ongoing legal counsel, corporate compliance, and contract interpretation to numerous private individuals as well as companies in varied fields.
November 18, 2021
Abraham W.
Abraham's practice focuses on counseling emerging group companies in the technology and other commercial agreements, and assisting equity financings (specifically venture capital).
Dave Y.
I am available for data privacy and cybersecurity projects. I am CIPP/US certified through the IAPP. I have also taken coursework focused on the GDPR through the London School of Economics. In my past career I was an intelligence officer. I am well acquainted with information security best practices and I have experience developing and implementing administrative controls for classified information and PII. I have worked extensively overseas and I am comfortable integrating with remote teams. Feel free to reach out any time if you have any additional questions on my areas of expertise or professional background.
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EARNEST MONEY DEPOSIT
Location: California
Turnaround: A week
Service: Drafting
Doc Type: Earnest Money Contract
Number of Bids: 2
Bid Range: $450 - $750
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