What Is Earnest Money?

Abby Husbands
Abby Husbands
Published on May 30, 2018

  Yep, there’s a difference & I’m going to explain the difference between earnest money and an option fee. This pertains to Texas. I don’t know how it works in other states, but today I’m going to be explaining how it works Texas. First up, Earnest Money. Earnest money is a deposit that a buyer gives a seller letting them know in good faith they’re going to purchase this home. Your earnest money is typically one percent of the sales price. If it’s a $300,000 home, your earnest fee is going to be $3,000. This earnest money check is made out to the Title company.  If it’s Austin Title, for instance, the buyer is going to make out a check to Austin Title Company for $3,000. This check will be held in an escrow account up until closing. If you, as the buyer, end up fulfilling your end of the contract and you close on this house, your earnest money will be credited back to you at closing. On a side note, there are 32 ways that you as a buyer can get out of a Texas real estate contract. If you’re representing yourself and you don’t know those 32 ways to get out of a contract and still get your earnest money back, then you need to hire an agent. That’s a whole other blog. In fact, I’m going to do a vlog on that because I’ve been seeing so many unrepresented buyers lately, that they want to deal directly with the listing agent and not have their own realtor. To me, I find that nutty. It’s a little nutso. Nuts. In a nutshell, Earnest Money is a deposit that the buyers give the sellers in good faith that’s held in an escrow account until closing. Moving on to the Option Fee. What is the option fee? Essentially, when you put a contract on a house, you’ll go through a Termination Option period which is usually 5-7 days. You’re giving the sellers money to temporarily take their house off the market while you as the buyer perform your due diligence. During your option period, you’re getting your home inspections. For instance, we’re using a $300,000 house as an example. It’s a $300,000 house. It’s a one percent earnest money, which is $3,000 and then the option fee is 10 percent of the earnest money. So, $300,000 house, $3,000 earnest money. You’re going to have a $300 option fee. You’re giving the sellers $300 for you to be able to back out during your termination option period for any reason. Cold feet. You do an inspection and things pop up on that inspection that you’re not comfortable with and you don’t want to move forward. You don’t have to give them a reason as to why you’re terminating during this option period. You can have a three day option period. You can have a 10 day option period. It’s completely up to you and your agent to figure out how many days you need to do your due diligence. Check out my YouTube vlog:   If you decide to back out, you give that option fee to the sellers and they keep it and you move on. If, after your option period is up, and you’ve negotiated all of your repairs and you decide that you want to go forward, finish up this contract and purchase the home, usually this option fee is credited back to you at closing. Earnest money is made out to the title company, held in an escrow account. The option fee is made out to the sellers. The sellers cash it. They keep that money. If you decide to move forward, that money is credited back to you at closing. Easy enough. Simple enough. If you have any questions, please reach out to me. I’m always here to help. I love answering your questions and I love working with first time home buyers. If you want to see more of my YouTube videos, please subscribe to my channel where I release a new video every week. Thanks so much. Have a good one!   *this blog was transcribed from my YouTube vlog using REV.

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