Earnest money is an important part of the real estate transaction process, especially when your buyer is up against several other interested buyers. If you find yourself in a situation where your buyer’s offer is accepted by the seller, the last thing you’ll want to do is miss the deadline for the earnest money deposit and run the risk of a breach/default in the contract. When there is a breach, the seller can legally back out of the agreement. Here’s everything you need to know about earnest money deposits in Texas, including a breakdown of what it is, how to work with VA loans, how much it is, as well as when and how to deliver it.
What is Earnest Money in Texas?
According to Texas Realtors staff, “Earnest money is an amount agreed to in the real estate contract that you will pay soon after entering the contract as a show of ‘good faith’ that you intend to purchase the property. If the deal closes, the earnest money is typically credited toward your home purchase.” Earnest money is not required to form a real estate contract, but it can definitely be advantageous for a buyer in a hot market. “Payment of the earnest money deposit is not a condition precedent to the formation of a binding contract,” Trey Wilson, a real estate lawyer in San Antonio stated. He works to defend buyers and sellers who feel they have not been treated according to their rights. If your client needs a lawyer who will protect them on multiple issues, he may be the answer.
Earnest Money and VA Loans
Earnest money deposits aren’t required for VA loans either, but they can help the seller consider your client as a more serious buyer. Not only that, they protect both parties. The VA Mortgage Center put it this way: “Putting down earnest money is a way to show sellers you’re a serious contender and give you leverage when negotiating. It’s common for the seller to pay some or all of the closing costs with VA loans. The best way to build this relationship with your seller is to show goodwill by putting in a good faith deposit.” Likewise, “When a buyer puts down earnest money, it reassures the seller that the buyer won’t back out without a valid cause. If buyers walk away for an invalid reason, they lose the money they put in their earnest money deposit.”
How Much is Earnest Money in Texas?
American Family Insurance offers reasonable guidelines to those wondering how much earnest money to put down on a home. “Generally, a buyer will deposit 1%-2% of the purchase price in earnest money, but that amount can be higher depending on your agreement. If your offer to purchase is $250,000, your typical earnest money amount would range from $2,500 to $5,000. In your offer, specify the amount of earnest money that goes into escrow should the seller accept.” Of course, that can vary depending on the market.
Brandon Cornett of the Home Buying Institute said, “Here in California, most buyers put down 3% for earnest money. In some markets, the standard amount might be $500 to $1,000 – regardless of the purchase price being offered. There are no laws governing this. It’s more a matter of local custom and tradition.” He went on to provide an example from his own home selling experience in Texas. “We had a buyer who put down $500… we had multiple offers. We were selling for $275,000, the $500 wasn’t equal to 1% of the purchase price. These buyers weren’t very ‘earnest’ about buying our house. We accepted a stronger offer, and that was the last we heard of the low-ball earnest money people. My advice: follow the local custom. Offer the average amount – no more, no less. You won’t risk insulting the sellers, nor will you have an unusually large amount of money on the line.”
Where to Deliver Earnest Money in Texas
Earnest money is given to an escrow agent. This is a trusted third party that holds the money until the transaction is finalized or a disagreement is resolved. James Chen of Investopedia said, “The funds or assets are held by the escrow agent until it receives the appropriate instructions or until predetermined contractual obligations have been fulfilled. Money, securities, funds, and titles to real estate can all be held in escrow.” Some title companies provide escrow services, but there are escrow agencies that don’t deal with the title. For example, First Texas Title in Abilene has escrow officers with “a combined 99 years of experience in Texas title insurance,” whereas Lawyers Escrow Company has escrow agents throughout Dallas, Houston, Austin, and San Antonio, but are not a title company. If you’re doing a business transaction, you may want to look into them even if you’re not closing deals in those cities. Their website states that they “close business transactions throughout the entire state of Texas.”
When to Deliver the Earnest Money
Now that all of the basics are established, let’s go into when to deliver the earnest money. The One to Four Family Residential Contract has a three-day deadline to deliver the earnest money. However, if the deadline falls on a weekend or legal holiday, it’s extended to the next business day. This means that if the contract is effective on a Wednesday, Thursday counts as day one, Friday is day 2. Saturday would be day three, but since it’s a weekend, day three will fall on a Monday. If that Monday happens to be a legal holiday, then the deadline would be extended to the next business day. If the contract is effective on a Sunday, Monday would be day one, Tuesday as day 2, and Wednesday would be day three since there are no weekends or holidays in-between. For a visual representation of this, visit the Texas Real Estate website.
How to Deliver the Earnest Money
Methods of payment for an earnest money deposit include personal checks, certified checks, and wire transfers. Certified checks are like personal checks, but they have been certified by banks and drawn on personal funds. The certification process marks the check and earmarks the funds for it. In order to get one, the client would first need to verify that their bank offers the checks, and inform the teller at their local branch that they’d like a certified check. The teller will verify the funds and stamp or mark them as certified. The client usually pays a fee for this service, so ensure that they know what to expect ahead of time. The client will need to keep their receipt until the check clears.
As far as wire transfers, your clients can usually do a bank-to-bank wire transfer in person at your bank or through your online account. Your client will need the recipient’s full name, contact information, and bank account details (routing and transfer number). Of course, there is a fee for this service as well. The transfer fees can range from $5-$50 to use this bank service. If your client is using a wire transfer service, they’ll need to contact the service and find out the specific details about their wire transfer process.
Although your client doesn’t have to provide earnest money to enter into a contract with a seller, it’s in their best interest to do so, especially if it’s a hot market and there are multiple buyers looking to purchase the home. Earnest money should be given to an escrow agent, which can be a title company. It should be delivered within three days after the contract’s effective date, unless the third day falls on a weekend or legal holiday, in which case it is due the next business day. Earnest money deposits can be sent via wire transfer, personal check, or certified check.
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Hi, I’m Sean and welcome to Close Concierge. I’m a licensed real estate agent in the state of IL (license #475202452). I’m also an active real estate investor and previously was CEO of a transaction coordination company, as well as a property manager. In total, I’ve been a party to more than 600 real estate transactions! I write on this website about once every week to answer some of the most common questions I come across on a day to day basis within real estate.