Earnest Money and the Option Fee in Texas, Explained
Buyers new to Texas often mix up earnest money and the option fee, but they work very differently. Knowing the difference can save you from losing money, or from missing a deadline that protects you.
What Is Earnest Money?
Earnest money is a deposit that shows the seller you are serious. Under the standard TREC contract, you deliver it to the title company named in the contract, which holds it in escrow until closing. At closing it is applied toward your down payment or closing costs. The amount is negotiable, and it is commonly a percentage of the purchase price.
What Is the Option Fee?
The option fee buys you the right to terminate the contract for any reason during an agreed option period, and it is paid directly to the seller, not held in escrow. If you close, the option fee is normally credited toward your costs at closing. If you terminate during the option period, you get your earnest money back, but the seller keeps the option fee.
Deadlines That Matter
Both payments are due within a short window after the contract's effective date, and the contract spells out the exact number of days. The option period itself is a fixed number of days you negotiate, and it ends at a specific time. Missing either deadline can put the contract in default or cost you your right to walk away. Put every date on your calendar the day you sign.
When Can You Get Earnest Money Back?
You are generally entitled to a refund if you terminate within the option period, or if the contract allows termination for a reason such as the buyer's financing not being approved or the appraisal coming in low, as long as you follow the contract's notice requirements. After the option period ends, terminating without a contractual reason can put your earnest money at risk. If you and the seller disagree about who gets it, the title company cannot decide for you. It will hold the funds until both parties sign a release or a court orders otherwise.
Our escrow team receives and secures earnest money for buyers and sellers across Houston and Dallas. Read about our residential closing services or call us before you sign if you have questions about your contract's deadlines.