Earnest money is an important part of the home buying process that could help you land the home of your dreams. It is a deposit made by a buyer in a real estate transaction to demonstrate serious intent to purchase a property.
Here’s an explanation of how this deposit works in a Texas real estate transaction.
What is it for?
Earnest money is an amount agreed to in the real estate contract that the buyer will pay soon after entering into a contract as a show of “good faith” that they intend to purchase the property.
If the buyer backs out of the deal without a valid reason, the seller typically keeps the earnest money as compensation for the time and effort lost.
If the transaction proceeds smoothly, it is usually applied towards the buyer’s down payment and other costs of buying the home.
How Much is Enough?
Choosing the right amount can show a seller you’re a serious buyer. A larger deposit might be one way to make your offer stand out among other offers, but you want to choose an amount you are comfortable with.
The amount can vary depending on the market and the agreement between the buyer and seller, typically ranging from 1% to 3% of the purchase price.
Your Texas REALTOR® can help you make an informed decision about how much earnest money to include with your offer.
Who Holds the Earnest Money?
An escrow agent, usually an impartial third party such as a title company, holds it until the transaction closes.
Who Gets the Earnest Money If the Transaction does not close?
If the transaction doesn’t close, the terms of the contract determine who receives the earnest money.
For instance, the earnest money is typically returned to the buyer if the buyer exercises his right to terminate during the option period.
If the buyer and seller can’t agree on who is entitled to receive the earnest money, things can get messy. Both parties need to agree in writing as to how it is to be dispersed. The escrow agent must take certain steps before releasing the earnest money or it could even end up in court.
A Texas REALTOR® can help you navigate your next home purchase and help you better understand earnest money. Find your agent now.
This article was written by the Texas Association of Realtors®, TAR, for members to share with the public. So, here you go!