What is earnest money?
Earnest money is money paid upfront by the buyer as a show of good faith in their intention to buy the home. When a buyer submits an offer on a house, they will designate an amount of earnest money in the contract — usually 1% of the purchase price. (Ex: $2500 for a $250,000 home.) Once the terms of the offer are agreed upon and the contract signed by all parties and executed (put in full effect by one of the agents), the earnest check must be delivered to the title company within 2 business days. The title company will cash the check right away and hold the funds in an escrow account. When the sale closes, the earnest money will be applied to the downpayment. In the event that the buyer terminates the sale, the earnest money MAY be refunded. There are many protections for the buyer built into the contract, and in most cases the earnest money will be refunded. However, it is important to remember that everything in a real estate transaction is time sensitive (time is of the essence) and if you don’t follow the rules, you will forfeit your earnest money. Your agent knows the rules and will manage the timeline so that you know when important deadlines are approaching.
Earnest money is sometimes confused with option money, though they serve very different functions. Learn more about the option fee here.
- Buyer writes earnest check at time of offer
- Usually about 1% of the purchase price of the home ($2500 for a $250,000 home)
- Payable by personal check made out to the title company
- Check will be cashed immediately and held in escrow until closing, at which time it will be applied to the buyer’s down payment
- Earnest money may be refunded if the buyer terminates in accordance with the contract, or kept by the seller if the buyer is in violation
This is how earnest money works in Texas real estate. Though the concept is similar across the board, you’ll want to consult your local real estate expert in other areas.
Thinking about buying or selling in Austin and have a question on how everything works? Call me and we’ll get you up to speed!