Free Earnest Money Agreement Template: Sample & FAQs (2024)

FAQs

Can a promissory note be used as earnest money? ›

Although most sellers are likely to require that earnest money be in the form of cash, check, or money order, they might also agree to accept a promissory note. The drawback for the seller is the possibility of having to file a lawsuit to collect on the note.

The purpose of earnest money is to provide the seller with compensation in the event that the buyer backs out of the deal through no fault of the seller and in violation of the agreements in the purchase contract. If that happens, the seller gets to keep the earnest money.

While the buyer and seller can negotiate the earnest money deposit, it often ranges between 1% and 2% of the home's purchase price, depending on the market. In hot housing markets, the earnest money deposit might range between 5% and 10% of a property's sale price.

Earnest money best practices

Make sure the amount and timing align with your purchase agreement. Putting down more upfront than agreed upon could delay processing. Be ready to potentially walk away from the earnest money if you back out, depending on the circ*mstance. Only offer what you are willing to lose.

Promissory notes are legally binding whether the note is secured by collateral or based only on the promise of repayment. If you lend money to someone who defaults on a promissory note and does not repay, you can legally possess any property that individual promised as collateral.

A handwritten or “informal” promissory note can be legally valid. What matters most is that the document clearly outlines the loan terms, including the loan amount, repayment schedule and the parties involved.

Although buyers losing their earnest money deposit is relatively rare in our market, it can and does happen. If a transaction devolves to the point of a buyer losing their earnest money, how much they committed in funds understandably becomes very vital.

If the financing fails, the buyer can pull out of the contract with a full refund for earnest money as long as it's before the specified deadline.

It depends on how far along your deal was. If you back out before a contract was signed, there are likely to be no consequences. If you already had a signed purchase agreement, though, you could potentially lose your earnest money deposit or even be sued.

The earnest money is usually about 1% to 3% of the property price. It can also rise up to 5%, and even 10%, if the property market is really hot, like what happened during the pandemic times. After we clear up the earnest money meaning, we should move on to its calculation.

Is earnest money refundable? ›

Your earnest money may or may not be refundable. Generally, if you are acting in good faith and have contingencies still in place, your earnest money is refundable. A contingency is a clause in a real estate contract or agreement specifying a condition that must be met within a certain period.

Earnest money is typically around 1% – 3% of the sale price and is held in an escrow account until the deal is complete. The exact amount depends on what's customary in your market.

Typically, you pay earnest money to an escrow account or trust under a third-party like a legal firm, real estate broker or title company. Acceptable payment methods include personal check, certified check and wire transfer. The funds remain in the trust or escrow account until closing.

A loan contingency can also prevent you from losing your earnest money deposit, which is the deposit made to a seller that represents your commitment to buy the home. If your financing falls through for any reason within the designated time frame, your deposit will be returned to you in full.

A promissory note is a legal document that states the borrower is indebted to the lender and promises to pay their mortgage back in full (including the principal and interest rate) by a specified date. Promissory notes describe exactly what you're agreeing to and provide you with details regarding your loan.

Secured promissory notes

The property that secures a note is called collateral, which can be either real estate or personal property. A promissory note secured by collateral will need a second document. If the collateral is real property, there will be either a mortgage or a deed of trust.

Paying earnest money deposit

Acceptable payment methods include personal check, certified check and wire transfer. The funds remain in the trust or escrow account until closing. That's when they get applied to the buyer's down payment or closing costs.

Legal tender is for official currency issued by and regulated by the government. A promissory note can be exchanged, just like currency, however, it is not issued by the government not regulated by it.