Is earnest money refundable? The release of earnest money is possible in Texas, under certain circumstances. In this article, we’ll talk about what those circumstances are, and any special considerations that you may need to advise your buyer to take before they sign the contract. Read on to discover how to ensure the return of earnest money in Texas!
When is their Earnest Money Refundable?
Buyer Backs Out During Option Period
Your buyer is entitled to the earnest money if they decide to back out during the option period. (For more on when the option period starts and how to extend the option period, feel free to check out our other articles.) If the seller refuses to cooperate, you can ask a title company to intervene. The title company usually provides notice that the seller will have a certain amount of time to respond before the title company automatically releases the money back to the buyer.
The Sale Closes for Your Buyer
If the home sale closes as expected, the earnest money is applied toward the buyer’s down payment and closing costs as a credit. It may not go back into your buyer’s pocket, but it’s still providing an advantage to buyers in this scenario: not only do they get their dream home, but they get a reward for having remained within the terms of the contract and closing the deal. The earnest money is put to good use.
Deal Falls Through After the Option Period
If the deal falls through after the option period, the fate of the earnest money deposit rests upon the terms of the purchase contract. “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 during home inspections. If the reason falls within the contracted agreement, the buyer will get the earnest money back,” Ashley Donohoe, Personal Finance Writer at PocketSense advises. Below we’ve listed what kinds of contingencies can help your buyer regain their earnest money even if the deal falls through.
Release of Earnest Money in Texas
Real estate laws for earnest money are very specific, especially in Texas. TREC (the Texas Real Estate Commission) works to ensure that terms are as clear as possible. Paragraph 23 of the One to Four Family Residential Contract for Resale even has online guides you can use to ensure you understand all of the necessary information. That said, in 2018 there was some controversy surrounding whether TREC should have proposed a form when the TAR (Texas Association of Realtors) has its own Release of Earnest Money form with clearer language. Since that was the last we heard of the proposed form, Texas realtors use the TAR Release of Earnest money form.
Smart Clauses for Earnest Money
If you think that your buyer may run into any hiccups during the transaction (after the option period), you should advise them to include contingencies that will help them regain their earnest money deposit. Listed below are the four most common contingencies that will be included in a contract.
Financing Contingency for Release of Earnest Money
According to a 2018 survey by the National Association of Realtors (NAR), 44% of closed home sales included a financing contingency. “A financing contingency is when the buyer makes an offer, the seller accepts, but the sale is contingent upon the buyer obtaining financing from a lender. Even buyers who are pre-approved for loans can find themselves unable to secure mortgage approval. Financing contingencies save your buyer from losing their earnest money deposit if they can’t get a loan.
Jean Folger, a financial writer, says: “A financial contingency will state a specified number of days the buyer is given to obtain financing. The buyer has until this date to terminate the contract (or request an extension that must be agreed to in writing by the seller). Otherwise, the buyer automatically waives the contingency and becomes obligated to purchase the property, even if a loan is not secured.”
VA Loans automatically protect a buyer’s earnest money if the appraised value comes in below the purchase offer. “This protection is part of every VA purchase loan,” according to Veteran’s United.
Deals Contingent on Appraisal of the Home
“In an appraisal contingency, the buyer makes their offer, the seller accepts it, but the deal is contingent upon the lender appraisal. If the buyer is seeking financing from a lender, the lender will require an appraisal to ensure that the asking price is in line with the actual assessed value of the home,” says the Homeward blog.
If the property doesn’t appraise for the minimum amount, it can be terminated and the earnest money will be refunded to the buyer. Sometimes, appraisal contingencies include terms that allow the buyer to move ahead with the purchase even if it’s below a specified amount. The number of days the buyer can take advantage of this is typically specified, and the buyer can negotiate with the seller to lower the price to its appraised value.
The contingency will specify a release date that the buyer must notify the seller of appraisal issues by. Otherwise, the contingency will be considered satisfied and the buyer won’t be able to back out of the transaction.
Home Inspection Contingencies to Protect the Buyer
If the prospective home comes back in need of repairs, your buyer can back out of the transaction, or negotiate with the seller to have repairs made. Alternatively, the buyer can ask the seller to lower their price so the buyer can make the repairs themselves. Home inspection contingencies are the most common kind of contingency (58% of buyers get home inspection contingencies).
Advise your buyer not to be too picky though. According to Homeward, “There’s no such thing as a completely clean inspection report, even on new construction. Many issues are easy fixes or information to alert home buyers of a potential problem. Some issues are big, particularly if they have anything to do with structural issues (foundation problems, crumbling chimney, live termites).” Those major issues are the ones that buyers should pay attention to.
Contingent on Selling the Buyer’s Current Home
“If you can’t sell the home you currently own before you close on another home, this contingency lets you back out of the deal with your earnest money in hand,” Kevin Graham of Rocket Mortgage states. Since many buyers have to sell their current home before they can afford their next one, this contingency is a huge help to buyers. Many sellers try to avoid these contingencies since it forces them to place the home sale as “pending” and creates delays. For this reason, this is one of the least likely contingencies to be approved.
You may decide to advise against home sale contingencies to remove the burden from the seller and increase the likelihood of the contract being accepted in the first place.
If the Buyer Still Wants to Back Out
The buyer can absolutely back out even after the option period has expired, even without contingencies. That said, if the buyer cancels the sale without just cause or doesn’t adhere to an agreed timeline, the buyer will lose all or part of their earnest money. Realtor Bill Gassett says, “Adhering to an agreed schedule is very important when it comes to buying and selling a home. The real estate business is all about making commitments and following them through.”
Give Your Buyer White Glove Treatment
If you’re an agent who closes two or more transactions a month, you could benefit from having a trusted transaction coordinator from Close Concierge to handle everything from contract to close. Our top-notch concierges know how to maintain compliance and save you time and money to ensure the transaction closes without a hitch. Contact us today or schedule a demo to get your own dedicated transaction coordinator and watch your sales soar!