What is an earnest money contract?

An earnest contract is a sum of money that you, as a buyer, provide to the seller as a sign of your genuine interest in purchasing the seller’s real estate.

This deposit is typically held in an escrow account.

This sum can also be called a good faith deposit or escrow deposit, since it is generally held in an escrow (third party) account.

Is earnest money refundable?

The deposit you pay for a new home can be refundable or non-refundable.

To clear up any doubts, you should carefully read and understand the terms of the purchase contract before signing it on paper or e-signing a sale agreement template.

For example, if the deal falls through due to contingencies such as financing or home inspection issues, the seller has to return the deposit.

In this and similar cases, when a contract breach occurs on the seller’s side, you have a valid reason to cancel the deal and receive a refund. 

On the contrary, if you deliberately waive contingencies, for instance, to raise your chances of closing a desirable real estate transaction in a highly competitive market and, post-deal, encounter inspection contingency issues, you are unlikely to get a refund.

How does the earnest money contract work?

When the sale agreement is signed, the under-contract process begins, and that’s when you need earnest money to put down.

The seller will often require a deposit to accompany the offer, and your real estate agent should be able (and willing) to assist you with any questions you have. 

Once deposited, your funds are securely held in an escrow account until the closing day rolls around.

On this day, the deposit merges into a contribution toward your down payment and closing costs.

However, this contract doesn’t handcuff you to purchasing the home. 

If a home appraisal exposes an overvaluation of your chosen home, or if you suddenly come across a better real estate opportunity elsewhere, you may decide to withdraw from the present deal.

In such a case, you’ll be leaving the earnest money deposit in the seller’s pocket. 

What information should be specified in my earnest money contract?

When drafting an earnest money contract, consider including the details given below as a means of shielding the interests of both parties.

Buyer and seller details

Check if the contract involves the correct and full names of both the buyer and the seller as well as other relevant information regarding the identities of the parties.

Property details

Include the exact address and a detailed description of the property for the transaction.

A fundamental step that eliminates any confusion about the property you purchase.

Purchase price

The financial aspect is a cornerstone of the transaction; you need to clearly state the total purchase price agreed upon by you and the seller.

Amount of deposit

Specify the exact amount of money that will showcase your intent and commitment toward the real estate.

Escrow agent information

Detail who will be holding and managing the deposit.

This reputable third party will be your escrow agent, tasked with adding security and trust to the transaction.

Conditions

Outline the conditions under which the transaction will proceed or can be canceled.

Here, you should detail who keeps the deposit under different scenarios.

Forfeiture

To avoid potential disputes, be 100% clear that the circumstances are defined under which the seller can keep your earnest money should you withdraw from the deal.

Closing date

State the expected closing date of the transaction and down payment.

You and the seller should understand the exact timeline to make the transaction process stress-free and transparent.

Additional terms

Any additional terms of the contract agreed upon with the seller can be placed here.

This section can cover a variety of specifics tailored to the unique nature of your transaction.

Signatures

As a final step, sign the contract yourself and have the seller sign and date the agreement, thus providing legal binding and consent.

You can use simple online templates with an e-signature to swiftly create, sign, and share your agreement.

What is the right amount of earnest money to put up?

The amount of the deposit for a home purchase may vary depending on local business practices, market conditions, and the terms in your sales contract.

If you’re unsure about how much earnest money you need, prepare to deposit about 1-2% of the total purchase price for your would-be home.

So, if you’re buying a $400,000 home, the escrow deposit may fall within $4,000 to $8,000. 

That said, if you’re shopping — and competing with others — in a hot market, prepare for a possible deposit amounting to 5-10% of the sale price.

How do I make sure my earnest money is protected?

To make sure your earnest deposit sails in safe waters, engage a reputable escrow agent to hold the deposit. 

Also, having a well-drafted earnest money contract will assure you of the conditions under which the deposit can be refunded or forfeited. 

Remember to seek the help of a law firm, whenever applicable, to review the contract before signing and check that all provisions are fair and in your best interest.

Draft a reliable earnest money deposit contract with PandaDoc

Your earnest money deposit contract should be accurately drafted to iron out all formalities of the buying process.

The simplest way to craft one is by using an earnest money agreement template like what we have available at PandaDoc.

By using this template, you can create well-articulated contract outlines and eliminate any gray areas of the home-buying process with respect to the good faith deposit. 

The PandaDoc platform makes it easy to manage all documents related to your home purchasing needs.

From tweaking the good faith template so it fits the specifics of a particular real estate transaction to helping organize all docs associated with your new home  — we’re here to help the entire process move forward! 

Check it all out by starting a 14-days trial today!