What is Earnest Money?

The definition of Earnest Money is “money paid to confirm a contract”. In a residential real estate contract is shows you are “earnest” in your intention to purchase the property and are putting this money at risk should you fail to close the transaction as the contract dictates.

What is Earnest Money in a Residential Real Estate Transaction?

What does this really mean? When we write a residential real estate purchase agreement, or contract, in the State of Texas, the Earnest Money amount is determined by the sales price of the property. Typically this is 1% of the sales price however there is no regulated amount. The Earnest Money can be higher or lower depending on how the buyer and seller negotiate the contract.

Where does the Earnest Money go?

In Texas, the Earnest Money is deposited with the title company within 2 days of the effective date of the contract. The title company puts this money in an escrow account for the buyer until which time the transaction closes or the contract terminates.

What Happens With the Earnest Money?

The Earnest Money still belongs to the buyer. The title company holds the money in escrow and it goes into the buyer’s “bucket”, or their side of the closing statement as money already paid toward the transaction.

What if the Contract Terminates? Who gets the Earnest Money?

Well, that depends. If the buyer terminates the contract within contractually acceptable times, i.e. Option Period or Financing Approval Period, then the Earnest Money is released back to the buyer by the title company. However, if the buyer terminates outside of the contract then the Earnest Money may be released to the seller as compensation.

How do I Make Sure I Don’t Lose My Earnest Money?

Talk to your Texas Realtor! As a buyer it is very important to be represented in the transaction and it is your Realtor’s fudiciary duty to guide you and help protect that Earnest Money. Generally, never enter into a contract without fully intending to close on the transaction.