What is Earnest Money in Real Estate?

Earnest money and option money are both funds that are put down in the first few days of an executed contract, and buyers are sometimes confused by what they’re for.  I recently shared a post explaining the option period and now I want to talk about earnest money in real estate. {If you’d rather watch than read, scroll down to the bottom for a video explanation about earnest money.}

What is Earnest Money and What Does it Do?

Earnest money is money given, by the buyer, to the title company within the first three days after a contract has been executed on a property.  It’s a show of good faith that the buyer intends to follow through and purchase the property.  It’s essentially a buyer’s skin in the game.

How Much Earnest Money is Needed?

In Texas, earnest money is typically one percent of the sales price of the home.

However, increasing the earnest money is a great way to stand out in a competitive market.  More money shows more seriousness on the part of the buyer and is one way to make an offer stand out in a competitive seller’s market.

What Happens to the Earnest Money at Closing?

When the deal closes, earnest money is typically credited towards the down payment.

If the deal doesn’t close as planned, details of the contract will determine who gets the earnest money.  If the buyer terminates the contract during the option period, earnest money will be returned, but if the buyer terminates later in the process, there’s a good chance they’ll forfeit the return of the earnest money and it will go to the seller.

More Questions about the Buying Process?

If you have more questions about the home buying process, I’d love to talk.  Call me at 214.223.0443 or email at randi@repeatre.com. 

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