Option Fee & Earnest Money
When you submit your purchase offer, you will provide a time period in which you can back out of the contract forany reason (Option Period). The Option Period is typically between 5 and 7 days and costs between $100 to $250. This money must be paid to the seller within 3 days of an executed contract. If you decide to back out, the sellers keep your Option Fee. If you continue with the purchase, the Option Fee will be credited towards your closing costs.
Typically the Earnest Money is 1% of the purchase price.The money needs to be at the title company within 3 days of an executed contract (check with your Agent). These funds are credited toward the down payment when the deal is closed.
Can you get your earnest money deposit back? – Yes!
As long as you perform according to the contract, you can get your full initial deposit back.Below are 5 common real estate contingencies that allow you to back out without losing your Earnest Money:
Inspection Contingency – gives you a chance to cancel if the inspection turns up major problems that the seller is unwilling to repair. Must terminate during Option Period.
Appraisal Contingency – allows you to back out if the appraised value of the property is less than the list price.
Finance Contingency –allows you to back out if your financing was not approved and you notified the seller within the time specified in your contract.
“Other Property” Contingency – gives you an “out” if your purchase was contingent upon selling your home and it failed to sell.
Home Owner Association (HOA) Contingency – when you buy a home governed by an HOA, you typically have 7 days to review all the association’s rules and fees.
Can You Lose Your Earnest Money? Yes!
Since your Earnest Money is a commitment to buying the property, you will be penalized if you back out of the purchase contract for no valid reason, e.g. buyer’s remorse, cold feet, or a change of heart. In those cases, you will forfeit your Earnest Money to the seller. If you change your mind after the offer has been accepted, the contingencies (explained above) are your only way to recover your deposit.
Make sure to make a copy of your Earnest Money check as well as your Option Fee check. It will be needed by your mortgage lender in order to credit these funds back to you at closing.