Before knowing what an earnest money agreement is, let us define what an earnest money contract consists of.
It is a private agreement carried out by two parties to commit to the sale and purchase of a home.
In other words, it is a contract in which the reservation of the sale of movable or immovable property is agreed upon, delivering an amount of money as a deposit as proof of this commitment.
The key to what an earnest money agreement is, unlike other modalities, is that in this case, the possibility of breach by either party is contemplated.
Main characteristics of the earnest money agreement
The most important characteristics of an earnest money agreement are the following:
- It has a validity period of 6 months from the time the signing takes place.
- The earnest money is paid at the time of signing the contract in the modality agreed upon by both parties.
- The mandatory determined amount is between 10% and 15% of the price of the home, but said amount may vary during negotiation.
- The responsibility for payment lies with the buyer of the home.
What is the purpose of the earnest money agreement?
The basic objective of an earnest money agreement is to obtain a margin of time and certain security for both parties, when facing all the preparations for the sale and purchase with peace of mind, without the property being able to be acquired by another buyer and with the guarantee that this commitment to purchase entails.
Differences between earnest and confirmatory money agreements
What differentiates earnest money from confirmatory money agreements is that the former allows for withdrawal from the contract, while in confirmatory ones, the other party can demand the fulfillment of the same.
What are the obligations of the parties in an earnest money agreement?
In an earnest money agreement, both the buyer and the seller assume the following obligations in the event that the purchase and sale contract is not formalized:
- If it is for a cause attributable to the buyer, they are the one who would lose what was delivered as earnest money.
- If it is for a cause attributable to the seller, they must pay the buyer double the amount delivered by the latter as a deposit.
Frequently asked questions about the earnest money agreement
In what situations is it recommended to use an earnest money agreement?
An earnest money agreement is recommended when there is a certain insecurity on the part of any of the parties involved in it:
- In the case of the buyer, it is convenient when there is no total certainty that they will be granted the mortgage.
- In the case of the seller, it is recommended if they are not clear about leaving the ownership of the property in the hands of another person.
What is the usual period to formalize the final contract after the earnest money?
Earnest money is paid at the very moment of signing the contract and, regarding the form of payment, it will be the one agreed upon between the buyer and the seller, which can be done in different ways: in cash, bank transfer, or by check.
What documentation is needed to draft an earnest money agreement?
An earnest money agreement consists of the following information and its corresponding documentation:
- Clear identification of the parties involved.
Identification of the object of the contract (which would be the property). - Amount of the earnest money and form of payment.
- Identification as earnest money and consequences of rescission.
- Address for notifications between the parties.
- Jurisdiction or competent court in the event that discrepancies exist between the parties in question.