Option Fees Vs. Earnest Money: What’s the Difference?

Key takeaways

• Earnest money and option fees are both payments buyers make when submitting an offer on a home, but they serve different purposes. 
• Earnest money shows a buyer’s commitment and is applied toward the purchase at closing. 
• Option fees secure the buyer’s right to terminate the contract during a defined option period. 
• Both payments have specific timelines, refund rules, and conditions depending on the purchase contract.

What is earnest money?

Earnest money is a good-faith deposit that demonstrates a buyer’s serious intent to purchase a home. It serves as a financial commitment to the seller, showing that the buyer plans to move forward with the transaction.

The amount of earnest money varies by market, but it typically ranges from 1% to 3% of the home’s purchase price. This deposit is usually delivered to the title company or escrow agent for safekeeping. If the deal closes, the earnest money is applied toward the buyer’s down payment or closing costs.

If the sale falls through under certain conditions, such as inspection or financing issues, the buyer may be able to recover the deposit. However, if the buyer cancels for reasons not covered in the contract, the seller may keep the earnest money as compensation.

Understanding earnest money

In most real estate contracts, earnest money is due shortly after the offer is accepted, often within three business days. It’s held by a neutral third party until the sale closes or the contract is terminated. This ensures that both the buyer and seller are protected during the transaction.

If the deal moves forward, the earnest money is credited toward the buyer’s closing costs or down payment. If the deal falls through under valid contingencies, the buyer may be entitled to a refund as long as all contract terms are met.

What is an option fee?

An option fee gives the buyer a defined option period, a short window of time to conduct inspections and decide whether to move forward with the purchase. During this period, the buyer can cancel the contract for any reason and only lose the option fee.

Option fees are typically smaller than earnest money deposits, often between $100 and $500. This fee compensates the seller for taking the home off the market while the buyer performs due diligence. It’s usually non-refundable, although if the transaction closes, the fee is credited toward the final purchase price.

Option Fees Vs. Earnest Money: Key Differences 

Feature	Earnest Money	Option Fee
Purpose	Shows the buyer’s serious intent to purchase the home.	Gives the buyer a limited-time, no-questions-asked right to terminate the contract.
Amount	Typically, 1-3% of the purchase price.	A smaller, negotiable amount, often less than $500.
When to pay	Typically paid within a few days of an executed contract.	Paid at the beginning of the option period, alongside earnest money.
Where it goes	Held in an escrow account with a title company or attorney.	Paid directly to the seller or to the title company on the seller’s behalf.
Refundability	Often refundable if the buyer terminates the contract during the option period.	Non-refundable, even if the buyer terminates the contract.
What happens at closing	Credited toward the buyer’s down payment or closing costs.	Credited toward the buyer’s down payment or closing costs.

Method of deposit

The deposit method is simply how a buyer sends the required funds after an offer is accepted. Most buyers use wire transfer, a certified check, or another secure electronic payment method. The contract will tell you exactly where the money should go, usually to a title company or escrow account. Once you make the deposit, keep your receipt or confirmation email so you can show proof if needed. Following the deposit instructions keeps the transaction on track and helps avoid delays or misunderstandings later.

Cancellation rights and deadlines

Buyers can usually cancel the contract and retain their earnest money under specific conditions outlined in the purchase agreement. The most common include:

• During the option period: The buyer can cancel for any reason and typically recover the earnest money, although the option fee is forfeited.
• If financing falls through: If the loan is denied despite a good-faith effort, the buyer may terminate under the financing contingency and keep the earnest money.
• If inspection or appraisal issues arise: If the property doesn’t meet inspection or appraisal standards and no resolution is reached with the seller, the buyer can cancel under the contingency clause.
• If the seller fails to meet obligations: If the seller doesn’t fulfill agreed-upon terms, the buyer may have grounds to terminate the contract and recover the earnest money.

If you cancel outside these conditions or after the option period ends, you may lose your earnest money.

Where does the money go at closing?

Both the earnest money and option fee are handled carefully during the transaction:

• Earnest money: This deposit is usually delivered to the title company or escrow agent, where it remains until closing or termination. At closing, it’s credited toward the buyer’s down payment or closing costs. If the sale falls through, the escrow agent releases the funds according to the contract terms.
• Option fee: This fee is often paid directly to the seller or through the title company, which then releases it to the seller. The option fee compensates the seller for taking the home off the market during the option period.

Always confirm payment delivery timelines and keep receipts for both payments to avoid disputes later.

Refund protocols explained 

Refund protocols simply explain when you can get your money back if the home purchase doesn’t work out. Your contract lays out the rules, but generally, you can get your earnest money returned if you cancel for a covered reason or within the allowed time.

Option fees are different since they’re usually non-refundable. If a refund is approved, the title company or escrow office sends the money back after both sides sign the paperwork. Knowing these basics helps you feel confident about what happens to your money if plans change.

Typical amounts and what buyers can expect to pay

Most buyers deposit between 1% and 3% of the purchase price as earnest money. For example, on a $400,000 home, that would range from $4,000 to $12,000.

The option fee is usually smaller, typically $100 to $500, depending on the property’s price, local market conditions, and the terms negotiated between the buyer and seller.

When are these payments due?

Both payments are typically due within a few days of the contract being signed. Earnest money is delivered to the title company or escrow agent, while the option fee is often sent directly to the seller.

Failure to make these payments within the agreed-upon timeframe could be considered a breach of contract, giving the seller the right to terminate the agreement.

Decision drivers and due diligence

According to Rocket Mortgage, the due diligence period starts after your offer is accepted and gives you time to inspect the home, verify its condition, and complete lender requirements. In some states, buyers may also pay due diligence money, which is a non-refundable fee paid directly to the seller for this inspection window. This is different from earnest money, which is held in escrow and is usually refundable if you cancel for a valid reason.

Knowing how each payment works can help you choose the structure that fits your comfort level. If you want more flexibility while you review the home, due diligence money may be the better fit. If you prefer a traditional approach with more protection, earnest money may align better with your needs.

Tips for homebuyers

• Follow payment timelines: Deliver both payments within the contract deadlines.

• Keep documentation: Always request and save proof of payment.

• Understand your rights: Review the option period and contingencies carefully.

• Negotiate strategically: In competitive markets, a higher earnest money or option fee may strengthen your offer.
  

Frequently asked questions

1. Can I lose both my earnest money and option fee?

Yes. If you cancel the contract after the option period ends and outside the agreed-upon contingencies, you may lose both payments.

2. What happens if the deal falls through because of inspection results?

If you cancel during the option period due to inspection concerns, you’ll forfeit the option fee but should recover your earnest money as long as your contract includes an inspection contingency.

3. Who determines the amounts for these payments?

Both the earnest money and option fee amounts are negotiable. Your real estate agent can help you decide what is typical for your market and what will make your offer competitive.

4. What is the difference between an option contract and earnest money?

An option contract gives the buyer the right to cancel the agreement for any reason during the option period, and the option fee pays for that flexibility. Earnest money, on the other hand, is a good-faith deposit showing your commitment to buy the home. Option fees are usually non-refundable, while earnest money is often refundable if you cancel for a valid reason.

5. What is an option fee in buying a house?

An option fee is a payment that gives the buyer an exclusive period to inspect the home and decide whether to move forward. It’s paid directly to the seller, is typically non-refundable, and compensates the seller for taking the home off the market during that time.

6. Do earnest money and an option fee go toward closing costs?

Yes, in most cases, both payments are credited toward your closing costs or down payment if the transaction closes. If the deal falls through, only the earnest money may be refundable, depending on the contract; the option fee is usually non-refundable.

7. Are option fees refundable?

Option fees are almost always non-refundable, since they pay for the right to cancel the contract during the option period. However, if the sale closes, the fee is typically credited toward your total purchase costs.

8. What is an option fee in buying a house?

 An option fee is a small payment made at the start of a contract that gives you a set number of days to inspect the property and decide whether to move forward. It provides flexibility and protects your ability to walk away, but the fee is generally non-refundable even if you cancel.

Making sense of earnest money and option fees

Both earnest money and option fees play important roles in real estate transactions. Earnest money shows commitment, while the option fee provides flexibility. Understanding how these payments work, including when you can cancel and how the funds are handled, helps you make informed decisions and move forward with confidence.

If you’re preparing to buy a home, talk with your real estate agent about appropriate amounts for each fee based on your budget and local market conditions.