Real Estate Tips
Earnest Money Explained
Earnest money helps you to secure your dream home. Looking into how earnest money works will prepare you get the home you have always wanted.
Everything you need to know about Texas earnest money rules: average earnest money deposit, TREC release of earnest money rules, what happens to earnest money & more.
How Much Is Earnest Money in Texas? Complete Guide to Texas Earnest Money
Earnest money is one of many important aspects of a Texas real estate transaction. For first time buyers, it’s often a confusing element and a possible hurdle to buying a home. For real estate agents and transaction coordinators, it’s one of many details to oversee that can delay closing or even cause a deal to fall apart.
Here’s what agents and buyers need to know about earnest money in Texas including guidelines on the typical Texas earnest money amount and when it must be deposited.
What Is Earnest Money?
Earnest money is money put down as a deposit with a Texas real estate purchase agreement. It’s a sign of good faith that a buyer intends to follow through with their offer and purchase the property.
Earnest money is not required to make a valid Texas real estate contract. However, the more competitive the real estate market, the more important it becomes. Sellers usually favor offers with a good faith deposit because they do not want to waste their time with a deal that falls through.
This good faith deposit is a lot like getting pre-approved for a mortgage before making an offer on a home – it reassures the seller they aren’t wasting their time. Agents usually advise clients put down earnest money to make sure their offer is considered.
The purpose of earnest money is showing you are a serious buyer
Once the seller accepts your offer, they take their home off the market and do not entertain other offers. The earnest money you deposit shows that you have skin in the game too. If a buyer backs out of a contract without a valid reason, the seller can keep the earnest money. This is compensation for the time and effort they’ve wasted and the need to relist their home.
Option Money vs Earnest Money
These two types of deposits are frequently confused and both must be delivered after signing a Texas real estate purchase agreement.
The option money is a non-refundable fee, but it can be applied to the sales price of the home after closing. This low fee is paid to have an option period during which you can enter the property, perform due diligence, and have the home inspected. This option period is usually 7 to 10 days, and you have the right to back out of the contract for almost any reason before it ends.
The typical option fee in Texas is $100 with a 7- to 10-day option period.
Earnest money is refundable, and it’s paid to the escrow agent to hold in escrow, not to the seller. It’s a good faith deposit that shows serious intent to buy the home. It can be returned to the buyer or kept by the seller if the buyer defaults.
Traditionally, the option fee was paid to the seller. TREC made a change to the standard Texas real estate contract regarding how option fees are paid. The revised contract form, which became mandatory in 2021, requires the buyer to deliver the option fee to the title company, not the seller, within 3 days of the effective date. This is the same deadline as the earnest money deposit.
How Much Is Earnest Money in Texas?
How much earnest money is normal depends on the norm where you live. In some areas, the typical earnest money deposit is a flat amount such as $1,000 or $5,000 regardless of the purchase price. In most places, you should put down a percentage.
The average earnest money deposit nationwide is 1% to 2% of the purchase price but 3% in California. If the market is very competitive, a higher earnest money percentage may be warranted to make your offer more attractive.
How much earnest money is required in Texas?
In most areas of the state, 1% of the purchase price or $500 is normal. In hot markets like Austin, an earnest money amount of 2% or more may be needed to stand out against other offers.
The median home price in Texas is $420,000. In most markets, you would put down $1,000 to $4,200 in earnest money. Texas markets where multiple offers are common may have higher expectations. Austin has a median home price of $656,000 – that’s $6,500 to $13,000 to put down 1-2% as a good faith deposit!
As a good rule of thumb, buyers should be prepared to put down the average earnest money amount Texas sellers expect – no more, but definitely no less. Putting down too little or forgoing the good faith deposit entirely can even be insulting to a seller or make them think the buyer isn’t serious or financially secure.
When Is Earnest Money Due in Texas?
The earnest money deposit is paid to the escrow agent after the purchase agreement is executed and signed by both parties but before three days have passed.
In 2018, the Texas Real Estate Commission (TREC) updated its standard Texas real estate contract for residential purchases to clarify when does earnest money need to be deposited.
The previous TREC contact stated that earnest money was due “upon execution of this contract,” a vague deadline that rarely happened. The standard contract now states:
“Within 3 days after the Effective Date, Buyer must deliver $__ earnest money to __, as escrow agent, at __.”
This 3-day deadline is extended is extended to the next business day when the earnest money due date falls on a legal holiday or weekend.
Agents need to be careful about calculating this due date. Do not exclude weekdays and holidays from the count – if the Effective Date is a Thursday, Friday is Day 1 and Saturday is still Day 2; the weekdays are not skipped to make Monday Day 2! In this example, because Day 3 is a Sunday, the deadline is Monday.
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Remember that the good faith deposit is not necessary to make the contract binding. What happens if buyer does not deposit earnest money? Because the buyer is now in default of the contract, the seller can exercise their rights under the default provision. The standard TREC contract has default provisions that allow the seller to cancel the contract if the earnest money is not deposited on time.
How to Pay Earnest Money
Earnest money in Texas is given to the title or escrow company, a third party trusted with holding funds and documents involved in the transaction until contingencies are met and the deal closes.
There are several options for paying Texas earnest money:
- Cashier’s check
- Certified check
- Personal check
- Money order
- Wire transfer
- Cash
The title company can choose which funds it accepts. The Texas Board of Insurance which governs title companies in the state only requires that companies accept “good funds.” Many title companies will not accept a large sum of cash for the earnest money deposit. If you use a check, the funds must clear before the earnest money is considered deposited.
Because there are drawbacks to using a check, including a potential waiting period for the money to clear, you should know how to pay earnest money without a check. A wire transfer is the most common and safest way to make your good faith deposit.
Buyers & Agents: Be Careful About Wire Fraud!
Wire transfer fraud is a growing problem that can be hard to spot! NAR offers advice for avoiding wire fraud such as using transaction management software or secure email for all communications.
If a third party such as the buyer’s agent deposits the funds on behalf of the buyer, Texas escrow rules require they sign a Third Party Deposit form.
What Happens to Earnest Money?
When you are putting down thousands of dollars, you want to know what happens to your deposit if the deal falls apart and how it’s credited when the transaction closes.
After closing on a house in Texas, the earnest money is generally credited toward the purchase of the home. That means it will go toward closing costs and/or your down payment.
If the deal falls through for any reason, who gets the earnest money will depend on the provisions of the contract. A general rule of thumb is the earnest money is refundable to the buyer if the seller terminates the contract or the buyer backs out with cause allowed in the contract. If the buyer terminates the contract, the seller can often keep the earnest money.
Who Gets Earnest Money if Deal Falls Through
If the transaction doesn’t close and the deal falls through, do you get your earnest money back? It depends on why the deal failed to close. Here is what happens to earnest money in common scenarios.
Buyer backs out during option period:
An option period gives the buyer a specific amount of time to have the property inspected and decide if they will continue with the purchase. This requires paying a small option fee.
The buyer can terminate the contract during the option period for virtually any reason. The earnest money will be returned to the buyer, but the option fee is forfeited to the seller.
The buyer must submit the TREC Release of Earnest Money form with the contract termination.
There are problems with the title:
The buyer has the right to object to the Commitment and Exception Documents within a certain number of days. This includes title issues the title insurance company will exclude from coverage (Schedule B). If the seller does not fix objections within 15 days, the contract is terminated and the earnest money is returned to the buyer.
The lender requires treatments or repairs:
If the lender requires any repairs or treatments, such as termite treatment, neither party is obligated to pay for it. If neither party wishes to, the contract is terminated and the deposit is refunded to the buyer.
The seller does not complete agreed treatments or repairs:
If the seller fails to complete repairs or treatments that have been agreed upon, or repairs are not done by an authorized or licensed person with the required permits, the buyer can extend the closing date or terminate the contract and have the deposit refunded.
The buyer’s financing falls through:
If the contract has a financing contingency, the buyer can have the deposit refunded and be released from the contract by completing the Release of Earnest Money TREC form.
If this contingency was waived by the buyer, the deposit is forfeited if financing falls through.
The buyer does not receive the seller’s disclosure:
If the seller does not deliver the seller’s disclosure notice about the property condition within the time specified, the buyer can terminate the contract and have their deposit refunded.
The appraisal is too low:
If an appraisal comes in too low, and appealing it doesn’t work, the buyer must pay the difference or the seller must drop the price for the deal to close. If neither are willing or able to do this, the contract can usually be terminated under the standard “property approval” contingency which requires the lender accept the property and its appraisal. In this case, the buyer’s earnest money is refunded, even after the option period.
Issues were found during the home inspection:
If the contract has a generous inspection contingency, the buyer can back out of the deal before the deadline passes if they are unhappy with anything turned up during the inspection. The buyer also has the option to ask the seller to make repairs or reduce the purchase price. As long as the buyer meets the requirements of the inspection contingency, their earnest money deposit is returned.
Be sure to carefully read the language of the contract. If there is a structural inspection contingency, it typically states that the buyer can only back out and have the earnest money released if the inspection finds a single defect that would cost at least $1,500 to remedy.
Note that the inspection contingency is frequently waived in hot markets. If you made an offer and waived this contingency, you cannot back out of the deal and get your deposit back no matter what the inspection uncovers.
The transaction does not close on time:
If either party prevents the transaction from closing on time, outside of issues the contract specifies allow the closing date to be extended, the non-defaulting party can exercise their rights under Paragraph 15. This may include retaining or refunding the earnest money.
The seller defaults on the contract:
If the seller does not comply with the terms of the contract, the buyer has the right to terminate the contract and request release of the earnest money or choose to enforce specific performance.
The buyer defaults on the contract:
If the buyer does not comply with the contract terms, they are in default and the seller has the right to terminate the contract and keep the earnest money deposit.
As a buyer, it’s important to understand when and how you can back out of a contract and keep your earnest money. Make sure you ask your agent about the consequences if you plan to waive any contingencies to strengthen your offer!
Rules for Release of Earnest Money in Texas
Releasing earnest money prior to closing can be done by submitting the Texas Release of Earnest Money form to the title company signed by the seller and buyer. The buyer can request this form be signed if they wish to back out with cause or if the seller has defaulted on the contract.
There is no official TREC release of earnest money form. The standard form most agents use is the TAR Release of Money Texas form.
This form must be signed by the seller and buyer and delivered to the title company. Once it is received, the earnest money will be released back to the buyer.
What if the seller refuses to release earnest money in Texas?
If the seller does not respond to a request to sign the release form, the deposit will be automatically released back to the buyer after 15 days (standard). The seller may respond by contesting the release in which case it may go to mediation or before a judge who decides who receives the earnest money.
The standard contract allows for damages if either party wrongfully fails to sign the release or wrongfully challenges it.
Texas Earnest Money FAQs
Here are quick answers to common questions about earnest money Texas buyers, sellers, and real estate agents have.
Is earnest money required in Texas?
Texas escrow law does not require earnest money and a contract is valid without it. However, it’s usually expected by sellers and an offer may not be accepted without it, especially if there are multiple offers.
When is earnest money due in Texas?
Unless the contract states otherwise, earnest money is due within 3 days of the contract’s Effective Date. The deadline is moved forward a day if Day 3 falls on a weekend or legal holiday.
How much is earnest money in Texas?
Depending on the local market conditions and norms, the average earnest money amount may be a flat amount such as $500 to $2,000 or a percentage of the purchase price, usually 1% to 2%.
Does earnest money go towards closing costs or down payment?
At closing, the earnest money deposit is credited toward closing costs and/or the down payment.
Is earnest money refundable in Texas?
Yes, Texas real estate closing laws allow earnest money to be returned to the buyer in many circumstances. This includes for any reason during the option period, if the seller defaults on the contract, and based on specific contingencies like financing and the home inspection.
Do you get earnest money back if loan is not approved?
Yes – as long as the contract has a financing contingency. If you waived this contingency, you will need to surrender the deposit if you cannot fulfill the contract due to financing.
Is a contract valid without earnest money?
Yes, a Texas real estate contract is still valid even if earnest money is not required or if the buyer has not made the deposit.
What if I don’t have earnest money?
Remember that earnest money is credited toward closing costs and the down payment at closing. Your real estate agent can advise you if your offer has a good chance of being accepted without earnest money, but it may be hard to get your offer taken seriously without putting down a good faith deposit.
Earnest money in Texas is a seemingly simple line item, but failure to meet specific deadlines can easily cause a deal to fall apart or worse – lead to a buyer losing their earnest money or even facing damages.
With so many contingencies, communications, and deadlines to manage in even a simple real estate transaction, it’s easy for real estate agents to get overwhelmed. Ready to save time on paperwork, ensure transactions close smoothly, and deliver the best experience to your clients? Get started with a dependable Texas transaction coordinator from Transactly who will handle all the paperwork and deadlines for you for a low flat fee!