WHAT IS EARNEST MONEY AND OPTION FEE? | HOME BUYING 101

When you and the seller agree to the terms of a contract, the next step is to deposit two checks made out to the title company: one for the earnest money deposit, and one for the option fee. The amounts are negotiated, but will be spelled out in the contract that both parties sign. But what exactly are these? Let’s dive in..

EARNEST MONEY

Earnest money is basically a deposit in good faith that you are serious about purchasing the home from the seller. The amount is generally around 1% of the purchase price, but can be negotiated beforehand. Could be more, could be less.

Upon both parties signing the contract, you have 3 business days to get this money to the title company or you are technically in default.

DO YOU GET THIS MONEY BACK?

Yes. Your earnest money deposit is credited back to you at closing.

For example, if the total cash you need to bring to the closing table is $15,000, and you deposited $3,000 for earnest money, you would only need to bring $12,000 to closing. Of course there are other factors at play, but I wanted to break this part down so that it is easily understood.

WHAT IF I DON’T PURCHASE THE HOUSE?

This is a discussion for you and your agent. Whether you hire The Lake Team to be your Houston real estate agent or someone else, they need to break everything down for you and let you know how the process works.

If you need to terminate a purchase contract for whatever reason, there are certain parameters written in the contract to protect you, but if you don’t terminate within those parameters you can lose your deposit or find yourself in court. One of those parameters is your option period, which we cover below…

OPTION PERIOD

In Texas real estate we have something called an option period. From the day that the contract is signed by both the buyer and seller (known as the execution date), you have “X” amount of days to perform inspections and negotiate repairs, if any. This is assuming that you have elected for an option period.

Some seasoned investors, or home buyers, waive the option period all together to sweeten the deal for the seller. But you should be very cautious doing this, as this is extremely risky if you don’t know what you are doing.

The amount of days we normally see for the option period is 7-10 days from the day the contract is fully signed by both parties. And the fee ranges anywhere from $150-300. Time is of the essence here!

Just like earnest money, your option fee needs to be deposited at the title company within 3 business days once the purchase contract is executed by both parties. So it’s best to deposit both earnest money and option fee at the same time, knocking out 2 birds with 1 stone. If you don’t deposit the option fee in time, you forfeit your ability to terminate the contract during this time.

INSPECTIONS

Assuming you deposited everything in time, the next thing you need to do is schedule your inspections for the property. The inspector will come out and find any defects to write in their report. No matter how big or small a problem is, if they find it, they will report it back to you.

The inspections typically take around 3 hours and you can most certainly be there if you wish. Once you receive the report, you and your agent should go through the entire report together, noting items that are of concern to you.

If you haven’t already, make sure you check out our video we did covering how to ask the seller for repairs.

FINAL STEP

Assuming you have negotiated repairs, if any, and you are comfortable moving forward, then congrats! You made it past the most difficult process when it comes to buying a house. The chances of getting to the closing table have now increased dramatically.

All you need to worry about from here is making sure you secure financing and get the final approval from your lender…. but that’s another topic for another day!

If you have any questions about something that wasn’t covered in this article, reach out to us and we can help you out. Or if you are ready to start your home search, schedule an appointment with us to get your home buyers consultation booked!

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