Real Estate Laws Regarding Earnest Money Deposit in Texas

Real Estate Laws Regarding Earnest Money Deposit in Texas
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When you're ready to place an offer on a Texas home that you like, you'll often put down a small amount of money in the form of an earnest money deposit. This deposit is perhaps 1 or 2 percent of the home's sale price, although the amount can increase if the housing market is hot or if there are multiple competing offers. While earnest money deposits in Texas are mostly handled like in other parts of the country, there are some state-specific laws regarding collection, use and return of these funds.

Earnest Money Deposit Basics

The Houston Realtors Information Service notes that earnest money is not mandatory to make an offer on a home. However, it's recommended since it serves to show the seller that you are really serious about the house and are willing to put up cash for their consideration. It also offers some security to the seller in case he accepts your offer and you decide to back out for some reason.

Your home purchase contract will set out the conditions under which you can back out of the contract and get your earnest money back. Texas also has its own laws on handling the deposit based on situations such as the buyer or seller not agreeing to the contract.

Earnest Money Vs Option Fee

It's important to note that the earnest money deposit differs from the option fee that is also a standard part of many home purchase contracts in Texas. While the earnest money gives the seller some security, the option fee gives you – the buyer – some security that you can receive the earnest money back if you withdraw from the contract within the agreed-upon option period, which usually is up to 14 days.

The buyer will usually use the option period to get a comprehensive home inspection done and decide whether to move forward based on the results. In any case, the option fee is not refundable like the earnest money deposit can be.

Texas Earnest Money Collection Laws

When you complete and sign the home offer, you'll usually include the earnest money deposit in the form of a check, although you can also use a wire transfer. After changes made in 2018, Texas law requires that your real estate agent delivers the earnest money within three days that the signed purchase contract is executed. However, there's an extension when the deadline is on a weekend or holiday.

Do note that the seller doesn't get your earnest money right away, even if your offer is accepted. Instead, once your offer gets accepted, the earnest money funds remain in a third-party escrow account – usually a Texas title company – throughout the home purchase contract period. In that account the earnest deposit also earns some interest while neither the buyer nor seller has access to the money.

Use and Return of Earnest Money

If the home sale successfully closes, then your deposited earnest money serves as a credit toward your down payment and any closing costs you have. It is at that point when those funds will be used.

If you back out of the contract during the option period, Texas law generally requires that you get your earnest money back. The same is usually true if the seller chooses to back out of the purchase agreement. In the case where you're legally due to have the earnest money refunded and the seller does not cooperate, a title company can intervene with a notice. In such cases, Hood Homes notes that the seller will have 10 days to respond before the title company automatically releases the money back to the buyer.

However, in cases where the deal falls through after the option period, what happens to the earnest money depends on your purchase contract terms. These contracts often have contingencies that handle issues like failing to secure financing, not being able to sell your existing home, getting a too-low appraisal or finding major faults in the home during inspections. If the reason falls within the contracted agreement, then the buyer will get the earnest money back. However, if the buyer broke the contract terms or wants out for another reason, the seller may legally keep some or all of the earnest money.