What is an earnest money contract?

Find out all the information about this previous step that you sometimes face before you buy or sell a property
An earnest money contract is a private arrangement between a buyer and a seller to make a prior commitment to acquire property or real estate official. It is also sometimes called an advance. When the buyer signs the contract, they must pay an amount agreed by the parties as a deposit. This makes the commitment to buy the property official and if either party then fails to comply with this arrangement, they will incur a penalty.
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Article 1,454 of the Civil Code sets forth the penalty amounts. If the buyer breaches the earnest money contract, they will forfeit the deposit. If the seller breaches the contract, they will have to pay the other party double the deposit amount as compensation.

An earnest money contract is usually entered into when a buyer is interested in a property and wants to prevent another potential buyer from acquiring it before they do. It is often the case that the buyer is trying to get a mortgage or negotiating financing terms with the bank and wants to be able to be able to deal with these procedures safe in the knowledge that the property they want to buy has been taken off the market.

Basic elements of an earnest money contract

The following are some of the items most frequently included in an earnest money contract.

  • Identifying data and National ID Card numbers of both the buyer and seller.
  • Information about the house or property involved in the sale. If the property is subject to any liens, these must also be included.
  • Price of the property. Details of which costs both the buyer and seller will be liable for must also be specified.
  • The deposit amount (which in this case is non-refundable) that the buyer pays the seller in order to enter into the earnest money contract. This money will be deducted from the final sale price agreed by the parties.
  • Deadline by which the sale contract must be signed.
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Withdrawing from an earnest money contract

Either party may withdraw from an earnest money contract after it is signed. If the buyer chooses to withdraw, they will forfeit the down payment (the money paid as a deposit) and if the seller chooses to withdraw they will have to pay the other party double the deposit amount.
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