What is Earnest Money in Real Estate?

Earnest money and option money are both funds that are paid in the first few days of an executed contract in a real estate transaction, and home 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 to the closing table and fully purchase the property. It’s essentially a buyer’s skin in the game.

How Much Earnest Money Do Home Buyers Need?

In Texas, earnest money is typically one percent of the offer price of the home, however, increasing the dollar amount is a great way to make an offer look better to a seller. More money shows more seriousness on the part of the buyer {the buyer obviously has more to lose if they don’t follow through according to the contract} 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 credited towards the down payment.

If the deal doesn’t close as planned, details of the contract will determine who gets the money and the timing of the contract termination is usually what makes the difference. 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 funds and that money will go to the seller.