Key takeaways
- Earnest money and option fees are both payments buyers make when submitting an offer on a home, but they serve different purposes.
- Earnest money shows a buyer’s commitment and is applied toward the purchase at closing.
- Option fees secure the buyer’s right to terminate the contract during a defined option period.
- Both payments have specific timelines, refund rules, and conditions depending on the purchase contract.
What is earnest money?
Earnest money is a good-faith deposit that demonstrates a buyer’s serious intent to purchase a home. It serves as a financial commitment to the seller, showing that the buyer plans to move forward with the transaction.
The amount of earnest money varies by market, but it typically ranges from 1% to 3% of the home’s purchase price. This deposit is usually delivered to the title company or escrow agent for safekeeping. If the deal closes, the earnest money is applied toward the buyer’s down payment or closing costs.
If the sale falls through under certain conditions, such as inspection or financing issues, the buyer may be able to recover the deposit. However, if the buyer cancels for reasons not covered in the contract, the seller may keep the earnest money as compensation.
Understanding earnest money
In most real estate contracts, earnest money is due shortly after the offer is accepted, often within three business days. It’s held by a neutral third party until the sale closes or the contract is terminated. This ensures that both the buyer and seller are protected during the transaction.
If the deal moves forward, the earnest money is credited toward the buyer’s closing costs or down payment. If the deal falls through under valid contingencies, the buyer may be entitled to a refund as long as all contract terms are met.
What is an option fee?
An option fee gives the buyer a defined option period, a short window of time to conduct inspections and decide whether to move forward with the…