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Earnest Money: FAQs

  1. What is "earnest money?"
  2. Do I have to pay an earnest money deposit to have a valid contract?
  3. How much earnest money should I pay?
  4. What happens to the earnest money before closing?
  5. Will my earnest money earn interest between contract and closing?
  6. Who can hold the earnest money?
  7. Under the standard Offer to Purchase and Contract form, who holds the earnest money?
  8. Is earnest money the same as an option fee?
  9. What if the standard contract form is not used?
  10. If a contract contains a rescission ("cooling off") period, can I get my earnest money back if I cancel the contract during that time?
  11. Is there a federal law that allows me to rescind my home loan and get my earnest money back?
  12. Under the standard Offer to Purchase and Contract, do I get my earnest money back if the transaction does not close?
  13. What if a contract fails and the seller and I cannot agree on who is entitled to the earnest money?

What is "Earnest Money?"

It is money you give to the seller, or the sellers' agent, to show your good faith when making an offer to purchase the seller's property.

Do I have to pay an earnest money deposit to have a valid contract?

Although no law requires it, sellers typically do require it. If you agree to pay earnest money but do not make the required payment or your earnest money check "bounces", you will probably be considered in breach of the contract.

How much earnest money should I pay?

The amount is negotiated between you and the seller. It is typically a small percentage of the purchase price and can vary depending upon local market conditions, the price of the property, the type of property, whether cash advances to a builder or seller are involved, and other factors.

What happens to the earnest money before closing?

The purchase contract governs where earnest money will go. It should also specify the amount(s) to be paid, when the payments are to be made, whether are money will be held in a trust (escrow) account, who will hold it, whether it will be credited against the purchase price at closing, and what may happen to it if the transaction does not close.

Will my earnest money earn interest between contract and closing?

PROBABLY NOT. Most earnest money is held by real estate brokers in non-interest-bearing trust or escrow accounts. In order for the money to earn interest, the buyer and seller must agree, and they also must determine who will earn the interest. Such an agreement should be included in the purchase contract and may require the assistance of an attorney to prepare.

Who can hold the earnest money?

Any person, or entity, agreeable to you and the seller, but usually a licensed real estate broker. As a buyer, be aware that if you allow earnest money to be held and deposited by a seller or by a builder or developer for use in construction, you risk that they will not be able to return it to you in the event the transaction does not close. Consequently, most buyers prefer to have a real estate agents or attorneys hold the earnest money deposit. Since they are licensed by the state and required to deposit the money in a trust or escrow account, this reduces the risk that the monies will be improperly used.

Under the standard Offer to Purchase and Contract form, who holds the earnest money?

The form permits the parties to select who will hold the money – typically, the listing firm. Whenever a licensed real estate firm or agent holds any earnest money, it must be deposited in a trust or escrow account until closing. However, if any addenda are used with the form, check to see whether they conflict with any provisions in the form concerning who will hold the earnest money or other pre-closing deposits.

Is earnest money the same as an option fee?

NO. The "option fee" is a separate fee the buyer may choose to pay under the standard Offer to Purchase and Contract for the right to walk away from the transaction during a specified period of time. While earnest money may be refunded under certain circumstances, the option fee is nonrefundable.

What if the standard contract form is not used?

Many developers, builders, employee relocation services and lenders' asset managers use their own sales contract forms. Generic contract forms are also commonly available and can now be found on the Internet. Many will require you to make an earnest money deposit or similar deposit, but they may differ from the standard form in how it is to be handled. For example, unlike the standard Offer to Purchase and Contract form which contains inspection and repair provisions, title requirements and other protections, there may be no provisions allowing you to obtain a refund of the earnest money under any circumstances. Therefore, you must read every contract form carefully and consult with your attorney if you have questions.

If a contract contains a rescission ("cooling off") period, can I get my earnest money back if I cancel the contract during that time?

PROBABLY. However, most purchase contracts do not have a rescission period. Only in certain kinds of transactions will you be allowed to cancel the contract. These transactions include developer offerings of condominiums, timeshares, and interstate land sales; and where a seller fails to give you certain disclosures in a timely manner, including the Residential Property Disclosure Statement and the lead-based paint disclosure. These rescission rights are usually created by state or federal laws. The amount of time varies but is typically only a few days. You should consult your own attorney about rescission rights in such transactions.

Is there a federal law that allows me to rescind my home loan and get my earnest money back?

NO. Although there is a federal law that gives you three days to cancel a home loan commitment, it does not give you the right to cancel a purchase contract and get a refund of your earnest money. Your obligation to purchase as set forth in the sales contract is unrelated to your right to obtain the best possible loan or avoid a loan that has hidden conditions. Even if the sales contract has a financing contingency clause, your cancellation of an approved loan is not one of the conditions that would release you from the sales contract.

Under the standard Offer to Purchase and Contract, do I get my earnest money back if the transaction does not close?

It depends on why the contract isn't consummated. For example, the standard contract typically includes various conditions and/or contingencies, which must be met for the contract to proceed. These may include the requirement that you make a good faith effort to obtain necessary financing or to sell your own property; or that the seller make certain repairs and provide good title. If the seller does not meet his requirements, you may be entitled to a refund. On the other hand, if you breach the contract, you may forfeit the earnest money deposit. The part injured y the breach may also seek additional damages or try to enforce the contract by asking for "specific performance" where a court is asked to compel the breaching party to perform their promise – either to purchase or to sell. If your purchase contract does not close, you should consult your attorney over the remedies that may be available.

What if a contract fails and the seller and I cannot agree on who is entitled to the earnest money?

According to the terms of the standard Offer to purchase and Contract and the rules governing real estate brokers, if there is a dispute between you and the seller over the return or forfeiture of an earnest money deposit, the broker must continue to hold the funds in trust until you and the seller resolve the dispute in writing or until a court decides the matter. The parties may also resolve disputes through voluntary or court-ordered mediation. If an attorney for your or the seller holds the earnest money, the attorney must hold or dispose of the funds in accordance with the rules of the North Carolina State Bar. When a form other than the standard Offer to Purchase and Contract is used, it may allow the seller access to the money whether or not the closing occurs as scheduled. In any event, while a broker is not allowed to pursue a claim for earnest money for you, the broker may appear as a witness in court and make documents available.