The ins and outs of earnest money

While purchasing a house is exciting, there's a lot involved in the process, especially from a financial perspective. Saving for a downpayment represents a big part of the equation; you also will likely pay costs associated with applying for and securing a loan, hiring an inspector, securing title insurance, and many other items. Many consumers feel they're writing checks left and right, and that's probably true!

What is earnest money?

One of those important checks covers earnest money. Essentially a deposit, earnest money refers to “good faith” funds submitted with an offer to purchase real estate.

When you've decided you want to purchase a particular home and you work with your Texas Realtor to come up with the offer, one thing you will have to decide is how much earnest money to offer the seller. Laying out an appropriate amount demonstrates that you're a serious buyer who's interested in the property and ready and willing to purchase the home.

How much should a buyer put down?

How much earnest money should you give the seller? Talk with your Texas Realtor to decide what's best. Factors that may affect your decision include your financial situation, housing market conditions, and the desirability of the property (meaning how likely it is that your offer will be competing with others). After all, if you really want the house, a larger earnest-money deposit may be one way to get your offer to stand out over otherwise-comparable offers. And if your dream house is located in a hot neighborhood during a strong seller's market, a big earnest-money deposit might be necessary just to ensure you're in the running.

Keep in mind that you increase your risk as you increase the amount of earnest money you offer. If the deal goes south after the expiration of the option period (a period during which you can get out of the contract for any reason) and the transaction unravels because you didn't meet the obligations set out in the contract, you may lose the earnest money. You should consider such a scenario when deciding the amount.

The bottom line is to communicate with your Texas Realtor, who will discuss specific details to help you make an informed decision about the appropriate amount of earnest money to include with your offer.

Who holds the earnest money?

Once you've written a check for the earnest money, where does it go? Usually, the earnest money is held by an escrow agent until the transaction closes. An escrow agent is an impartial third party, such as a title company. If the deal goes through, the earnest money is typically applied to your closing costs.

If the transaction doesn't close and the parties can't agree on who is entitled to the earnest money, things can get messy, sometimes even ending up in court. That's one important reason to work with a Texas Realtor and other professionals who understand the process and can help you make good decisions.

In the end, your good faith deposit is essential to the homebuying process. It shows the seller you're serious and it's one of the first steps that will take you down the path to homeownership.

For more information about buying, selling or leasing real estate in the Lone Star State, I invite you to visit TexasRealEstate.com.