What Texas Homebuyers Need to Know About Earnest Money

When you’ve found the home you want to purchase, you’ll sit down with your real estate agent to fill out the required paperwork.

One of the primary questions, after the price you’re offering and the amount of your down payment, is how much earnest money you’ll deposit. While often included with the offer, here in Texas this earnest money must be deposited into a trust account within 3 days of a fully executed contract.

Why do we need to deposit earnest money?

Buyers deposit earnest money to show good faith – that they are in earnest about making the purchase. It is a serious commitment.

How much earnest money must a Texas homebuyer deposit?

Real estate law does not demand that the buyer deposit earnest money. However, practicality does demand it. Likewise, practicality demands that the earnest money be of an amount to indicate the buyer’s commitment to purchasing the house.

The larger amount shows the sellers that the buyers are serious – that they aren’t going to cancel the contract on a whim and risk losing that money.

1% to 2% of the purchase price is a common amount for earnest money. However, in competitive situations, buyers may wish to deposit more. In slow markets, you may choose to deposit less.

Before handing over your earnest money, be sure that you’re dealing with a licensed real estate agent and that the money will be held in trust by an established Title Company.

Is earnest money an extra charge?

No, the amount you deposit as earnest money will become a part of your down payment on the house.

What if the transaction falls through? Will I get my earnest money back?

What happens to your earnest money depends entirely upon the reasons why the sale fell through and the terms outlined in your purchase contract.

Financing: If you’re getting a mortgage loan, your contract is probably contingent on financing. This would include lender approval for your loan, plus an appraisal at or above your purchase price. If you can’t get financing or if the house doesn’t appraise, you’ll get your money back.

This is one reason why more and more agents and sellers require a lender pre-approval before accepting a purchase offer. No seller wants to wait weeks and begin packing, only to learn that the buyer didn’t qualify for a loan.

In hot markets, where several buyers are competing for the same home, some buyers have been waiving the financing contingency.

Buyers should understand that even if they’ve been pre-approved for a mortgage loan, things can change. Interest rates could change, pushing the monthly payment out of their range. A borrower could lose a job or become ill. The borrower could do something foolish – like make a credit card deposit on a cruise several months in the future.

These things and others could cause the loan to fail, and the buyers would lose that earnest money.

Inspections: Most home buyers do include an inspection contingency in their offer. This protects the buyer from purchasing a house with problems that will cost additional thousands. Generally, there’s a clause stating how much the seller will spend to correct minor issues found on an inspection.

In hot markets, some buyers have also been waiving this contingency. In that case, their only choices after a troubling inspection would be to buy the house anyway or lose their earnest money.

Clear title: One contingency that applies nation-wide is clear title. If the seller (via the Title Insurance Company) is unable to give a buyer clear title, the agreement will terminate and the buyer will get his or her earnest money deposit back.

What if I simply change my mind?

If you terminate the contract for no reason other than “I’ve changed my mind,” expect to lose the earnest money.

This is why home buyers should think carefully and be SURE that they really do want the house in question before writing an offer and depositing earnest money.

Get pre-approved before you shop.

If you’re dreaming of a new home, obtaining a mortgage loan pre-approval should be your first step. We here at Homewood Mortgage, the Mike Clover Group, will be happy to provide that service.

Call us today at 800-223-7409