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How Does Earnest Money Work for Oregon Home Buyers?

Home buyers in Oregon tend to have a lot of questions about earnest money deposits. First-time buyers, in particular, want to know how earnest money works, how much they should pay, etc.

And we have your answers! Here’s an overview of earnest money procedures, payments and customs in Oregon, from a buyer’s perspective.

What Is Earnest Money Exactly?

Let’s start with a basic definition. The phrase “earnest money” pretty much says it all. This is money paid by the home buyer that shows they are earnest (or sincere) about buying a particular house. It shows the seller that the buyer is indeed serious about purchasing.

This money can be applied to the home buyer’s purchase if the transaction moves forward. In other cases, it can be transferred to the seller if the buyer backs out of the deal without justifiable cause.

How the Process Works in Oregon

In Oregon, the earnest money deposit is typically paid when the buyer and seller enter into a contract. And here we are talking about the real estate purchase agreement or contract. It’s customary for buyers to make the earnest money payment when they submit an offer. The funds are usually held by a neutral third party, such as an escrow company.

If the transaction proceeds forward, the earnest money deposit is typically applied to the home buyer’s closing costs or down payment.

But the earnest money is more than just a show of sincerity. In theory, it reimburses the seller in cases where the buyer fails to live up to their obligations under the real estate contract. In other words, it compensates the seller for “damages” resulting from a buyer who backs out of a contract with no good reason.

The Oregon Association of Realtors explains this well in their overview on the subject:

“Rather than simply an indication of intent and ability to perform, earnest money became the source of funds to pay damages if the deal failed. The shift from a source of confidence in the buyer’s financial position to the source of funds to pay damages is subtle but critical to understanding the modern use of earnest money.”

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When Can the Seller Claim It?

So, under what conditions can the seller claim and keep the buyer’s earnest money in Oregon?

The contractual circumstances that would allow a seller to claim this money can vary with the contract. In most cases, these stipulations are clearly spelled out within the real estate contract, to avoid misinterpretation. This is partly why it’s so important for both the buyer and seller to read / understand the purchase agreement.

There are legitimate reasons for a buyer to back out of a contract, and these can be written into the contract as “contingencies.” For example, two common contingencies have to do with the home inspection and the buyer’s mortgage financing. These allow the person buying the home to exit the transaction if a major issue is uncovered during the inspection, or if a problem arises with the mortgage loan.

On the other hand, if the buyer backs out simply because of a change of heart or “cold feet,” the earnest money could be transferred to the seller. But again, it depends on the specifics of the real estate agreement.

How Much Earnest Money Is Enough in Oregon?

There is no law that dictates how much of an earnest money deposit a home buyer in Oregon should pay, when making an offer to buy a house. The amount is usually based on local customs within the real estate market.

This is one of the reasons why we encourage home buyers (and especially first-time buyers) to work with an experienced real estate agent. An agent can tell you how much of an earnest money deposit is reasonable in the Oregon town or city where you are buying a home.

With that being said, earnest money deposits can range anywhere from a few hundred dollars to a few thousand — depending on the real estate market.

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