What You Should Know About Earnest Money

Woman holding one-hundred dollar bills, money for earnest money.

Earnest money is an important part of the home buying process that could help you land your dream home. Here’s an explanation of how it works in a Texas real estate transaction.

What is it?

Earnest money is a show of “good faith” that you’re serious about buying the house. The amount is agreed to in the real estate contract, however, as the buyer, you make the first offer. This sort of puts your money where your mouth is and shows the seller that you intend to buy the property. Be aware, there is a deadline in the contract for a timely deposit, so be sure your funds are available. When the deal closes, the buyer typically gets credit for the earnest money toward the down payment or other buyer closing costs.

 How Much is Enough?

Choosing the right amount can show a seller that you’re a serious buyer. A larger deposit could be one way to make your offer stand out from other offers.  That being said, you need to choose an amount you are comfortable with. Your North Point REALTOR® can help you make an informed decision about how much earnest money to include with your offer.

Who Holds it?

It usually goes to an escrow agent—an impartial third party such as a title company — who 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 example, if the buyer exercises his right to terminate during the option period, it typically goes back to the buyer. If the buyer and seller can’t agree on who is entitled to the earnest money, things can get messy. Sometimes even ending up in court.

Conclusion

Earnest money is an important part of contracting and you need to be clear about why you’re writing the check. A North Point REALTOR® can help you navigate your next home purchase and help you better understand earnest money.

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The Texas Association of Realtors®, TAR, wrote this article for members to share with the public. So, here you go!

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