Earnest Money Explained: What Every Property Buyer Should Know
- Kristy Marie Nichole Rodriguez
- Apr 15
- 3 min read
When buying a repurchased or secondhand property, earnest money is one term you’ll likely encounter early in the process.
Whether looking at a condominium, house and lot, or vacant lot, understanding how earnest money works and compares to a down payment or option money is essential to protecting your investment.
What is Earnest Money?
Earnest money is a good-faith deposit made by a buyer to show they are serious about purchasing a property. It is typically paid after an initial offer is accepted but before the signing of a formal agreement, such as the Contract to Sell.
This payment serves as a commitment to proceed with the transaction. The amount varies depending on the seller and property value but is usually deducted from the total price once the deal moves forward.
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Earnest Money vs Downpayment
Understanding the difference between earnest money and down payment is key to avoiding confusion during the buying process.
Earnest money is a small initial deposit that demonstrates your intention to buy.
Downpayment is a more substantial amount paid when both parties agree to move forward with the sale, usually around 10% to 20% of the total purchase price.
The earnest money becomes part of the downpayment once the sale progresses. However, it doesn’t replace it. Think of it as a preliminary step toward securing your dream property.
Earnest Money vs Option Money
People also compare earnest money vs option money, and while they both show interest in purchasing, their legal implications differ:
Option money is paid to the seller in exchange for the exclusive right to purchase the property within a specified timeframe. It’s commonly non-refundable, even if the buyer decides not to proceed.
Earnest money, meanwhile, is typically refundable under certain conditions and is a stronger sign of the buyer’s intent to push through with the transaction.
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Is Earnest Money Refundable?
A common question buyers ask is: Is earnest money refundable? The answer depends on what’s written in your agreement.
If the seller backs out or fails to meet agreed-upon conditions, the buyer is usually entitled to a full refund.
If the buyer withdraws from the deal without valid legal grounds, the seller may keep the earnest money as liquidated damages.
This is why having a clear earnest money agreement—preferably in writing and reviewed by a real estate lawyer—is crucial to avoid disputes.
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Why These Terms Matter When Buying Property
In a competitive real estate market, offering earnest money can strengthen your offer and increase your chances of securing the property. It tells the seller you’re committed and ready to proceed.
On the other hand, if you’re still weighing your options and want to “hold” the property temporarily, option money might be more appropriate—just be aware that it’s often non-refundable and does not guarantee the property unless followed up by a contract.
Both are valid tools in the buying process, but they serve different purposes.
Whether you’re paying earnest money, option money, or preparing for a downpayment, always understand the purpose and conditions behind each payment. Never give money without a written agreement, and always deal with licensed brokers or property developers to protect your interests.
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