What is Earnest Money?

What is Earnest Money?

Earnest money is a buyer's deposit showing a serious commitment to purchase a property. It is held by the title company (escrow agent) and generally credited toward the purchase at closing.

HOW MUCH IS REQUIRED?

A common starting point is 1% of the sales price, but the amount is fully negotiable between buyer and seller.

Example: On a $500,000 home, earnest money might be $5,000.

WHEN IS EARNEST MONEY DUE?

The buyer must deliver earnest money to the designated title company within 3 days after the contract's effective date. The deadline is generally 11:59 p.m. on day three. If day three falls on a Saturday, Sunday, or legal holiday, the deadline extends to the end of the next day that is not one of those days.

IMPORTANT: Title companies typically accept payments during business hours. Deliver funds early and confirm receipt. Starting a transfer does not necessarily mean the money has been delivered.

Why Does Earnest Money Matter to the Seller?

When a seller accepts an offer, they generally take their home off the active market and may pass up other buyers. That is a meaningful commitment and a financial risk.

If the buyer later terminates, the home may return to the market. This can create a negative perception, sometimes called a stigma: other buyers may assume something is wrong with the property, even when the termination had nothing to do with its condition.

Returning to the market can affect buyer interest, negotiating leverage, and the seller's ability to obtain the same price. Earnest money shows the buyer is serious about purchasing the property.

What Happens If Earnest Money Is Late?

Missing this deadline is a serious contractual failure. Under Paragraph 5C of the contract, if the buyer does not deliver earnest money on time, the seller may terminate the contract, pursue remedies under Paragraph 15 (Default), or both. The seller must give notice of termination before the buyer delivers the late earnest money. The buyer could face significant legal and financial consequences.

How Does the Option Period Protect Earnest Money?

If the buyer properly obtains a Termination Option, they may terminate for any reason during the Option Period and receive a refund of earnest money by delivering timely written notice.

If the option fee is not delivered on time, the buyer loses this unrestricted right to terminate. The buyer still owes the earnest money and may risk losing it if they later default. Other contractual termination rights may still apply.

Can the Seller Keep the Earnest Money?

If the buyer defaults, the seller may be entitled to earnest money as damages under the contract. However, missing a deadline does not automatically give the seller money that was never deposited. The contract and circumstances control the parties' rights.

Legal Guidance: Real estate agents and brokers cannot practice law or provide legal advice. For disputes or questions about legal rights, Realty Texas recommends consulting an attorney at the party's own expense.

IMPORTANT REMINDER: Once agreed to, earnest money is a contractual obligation. The amount is negotiable; the delivery deadline is binding. Deliver earnest money and any option fee promptly and confirm receipt with the title company.