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Learn About Earnest Money in Texas Real Estate Contract

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If you’re planning to buy a home in Texas, you’ll likely come across the term “earnest money.” What is earnest money in Texas real estate? Is it refundable? What do you need to know about it?

In this article, we’ll cover everything you need to know about earnest money in Texas real estate, including what it is, how to pay it, and what happens if you can’t make the deposit.

What Is Earnest Money in Texas Real Estate?

Earnest money is a deposit made by a buyer to show that they are serious about purchasing a property. The earnest money deposit is held in escrow until closing, at which point it is applied to the buyer’s down payment.

In Texas, deposits made for earnest money are usually between two and five percent of the purchase price of the home. For example, if you’re buying a $300,000 home, your earnest money deposit could be as much as $15,000.

While earnest money is typically a small percentage of the overall purchase price (usually between 0.01% and 0.03%), it can still add up to a significant sum of money. For example, on a $300,000 home, your earnest money deposit could be as high as $900. 

Is Earnest Money Refundable in Texas? What You Need to Know

In general, earnest money is refundable if the buyer backs out of the contract for a legitimate reason (more on that below). However, there are some circumstances where the seller may keep the deposit.

For example, if the buyer fails to get financing or inspector finds serious problems with the property, the seller may be able to keep the earnest money.

It’s important to review your contract carefully to see what conditions must be met in order for the earnest money deposit to be refunded.

How to Pay Earnest Money?

Earnest money is typically paid by certified check or wire transfer, and it is held in escrow by the title company or real estate agent.

The amount of earnest money can vary, but it is typically around one to two percent of the purchase price. For example, on a $200,000 home, you would pay $2000 in earnest money.

If the deal falls through for any reason, the seller will usually return the earnest money deposit to the buyer. However, there are some situations where the seller may be able to keep the earnest money, so it’s important to understand the contract before signing it.

There is no set amount for how much earnest money in Texas is required. The amount will be determined by the contract between the buyer and seller.

Smart Clauses for Earnest Money

If you’re writing an earnest money contract, there are a few clauses you’ll want to include to protect yourself.

  1. Specify the amount of earnest money paid: The earnest money deposit shall be $2000.
  2. Include a clause that specifies what conditions must be met in order for the buyer to receive a refund of their earnest money: The deposit is refundable if the buyer obtains financing within 30 days of signing the contract. If the buyer is unable to obtain financing, the earnest money deposit shall be forfeited to the seller.
  3. Indicate how and when the earnest money will be paid: The deposit shall be paid by certified check within 48 hours of signing the contract.
  4. Specify a timeline for the earnest money deposit: The deposit must be paid within five days of signing the contract.

 

Including these clauses will help ensure that both parties are clear on what is expected and protect your interests in case something goes wrong.

How to Get Earnest Money Back in Texas?

If you’re wondering how to get earnest money back in Texas, the process is relatively simple. First, you’ll need to review your contract to determine if there are any conditions that must be met in order for the earnest money deposit to be refunded.

If there are no conditions specified, you can typically get your earnest money back by requesting a refund from the title company or real estate agent who is holding the deposit in escrow.

It’s important to note that if the contract does specify conditions that must be met in order for the earnest money to be refunded, you’ll need to meet those conditions before requesting a refund.

For example, if the contract states that the earnest money is only refundable if the buyer obtains financing within 30 days of signing the contract, you’ll need to obtain financing within that timeframe in order to get your earnest money back.

 

If you’re unable to meet the conditions specified in the contract, you may forfeit your earnest money deposit. That is why it is best to understand what is earnest money in Texas real estate before signing any documents.

How Long Until Earnest Money Is Deposited?

Once the binding contract has been negotiated, the agent should deposit the earnest money within three business days. If the earnest money is not deposited within that timeframe, the buyer may be able to cancel the contract.

If you’re thinking of buying a property in Texas, it’s important to understand the role that earnest money plays in the real estate transaction. Earnest money is a deposit made by the buyer to demonstrate their good faith in the purchase of a property.

What happens If Buyer Failed to Deposit Earnest Money?

If the buyer does not make the earnest money deposit, the seller may cancel the contract. The seller may also keep any money that has been paid towards option fees or other deposits.

If you’re unable to make the earnest money deposit, you may be able to negotiate with the seller to lower the amount. In some cases, the seller may be willing to accept a lower deposit or even waive it altogether.

It’s important to note that if the earnest money deposit is not made, the buyer may still be obligated to purchase the property under certain circumstances. For example, if the contract states that the earnest money deposit is non-refundable and the buyer does not make the deposit, the seller may sue the buyer for breach of contract.

Therefore, it’s important to understand the contract before signing it and to make sure that you’re able to make the earnest money deposit before committing to the purchase of a property. Find out more information on what is earnest money Texas rules before you make any commitment.

Rules for Texas Release of Earnest Money

Texas release of earnest money is governed by the Texas Property Code. The code requires that the seller must release the earnest money to the buyer within three business days of receiving written notice from the buyer that they are terminating the contract.

The notice must be in writing and must be delivered to the seller either in person or by mail. If the earnest money is not released within three business days, the seller may be subject to a penalty of up to $500.

Is Earnest Money Required When Buying a House?

You may wonder if is earnest money required when you buy a home. While earnest money is not required when buying a house in Texas, it is typically expected that the buyer will make a deposit of at least one percent of the purchase price.

In some cases, the earnest money deposit may be higher. While the exact amount of the earnest money deposit is negotiable, it’s typically best to make a larger deposit as this shows that you’re serious about buying the property.

What Happens if Buyer Backs Out of Real Estate Contract in Texas?

If the buyer backs out of a real estate contract in Texas, they may forfeit their earnest money deposit. The seller may also sue the buyer for breach of contract.

It’s important to note that if the contract states that the earnest money is non-refundable, the buyer may not be able to get their deposit back even if they cancel the contract.

Top Scenarios When Earnest Money Is Forfeited

There are a few common scenarios when earnest money may be forfeited. These include:

  • The buyer is unable to obtain financing within the timeframe specified in the contract: If the contract states that the buyer must obtain financing within 30 days and they are unable to do so, they may forfeit their earnest money deposit.
  • The buyer is unable to meet the conditions of the contract: If the contract states that the earnest money is only refundable if certain conditions are met and the buyer is unable to meet those conditions, they may forfeit their deposit.
  • The buyer backs out of the contract: If the buyer decides to cancel the contract, they may forfeit their earnest money deposit.
  • The buyer fails to perform a required inspection: If the contract requires the buyer to perform an inspection and they fail to do so, they may forfeit their deposit.

If any of these scenarios occur, the buyer may forfeit their earnest money deposit.

The Bottomline

Texas real estate earnest money is typically expected to be one percent of the purchase price. The earnest money deposit is typically held in escrow by the title company or real estate agent and is used to offset any damages that the buyer may cause during the inspection period.

It’s important to understand the rules governing earnest money in Texas before entering into a real estate contract. If you have any questions about earnest money deposits or real estate contracts, it’s always best to consult with an expert who specializes in real estate. This will help you understand what is earnest money in Texas real estate and help you buy a property.