Plain definitions of the terms you’ll hear when you buy a home in Texas, from pre-qualification to closing, with the contract rules taken from the state’s standard resale form.
Once you and a Texas seller sign a contract, the clock starts on your earnest money, your option fee and your option period. Miss one and it can cost you money.
So, here are some of the most common real estate terms and what they mean, roughly in the order you’ll run into them. Where a definition depends on the contract, we’re reading from the Texas Real Estate Commission’s standard resale form, TREC No. 20-19. Your own contract is the one that counts, so read it, and ask your agent or an attorney about anything you’re unsure of.
Pre-qualification vs. pre-approval
Both pre-qualification and pre-approval deal with mortgage and lending. Let’s look at each one.
Pre-qualification
A pre-qualification is a letter from a lender that estimates what you might be able to borrow. This is an early step in your home buying process. Some lenders base it on information you report, like annual income and savings, without verifying it yet, and a lender may check your credit.
Pre-qualification also allows you to learn about different mortgage options and talk to your lender about which one is best for you and your situation. If you’re buying your first home, it’s a good place to start.
Pre-approval
A pre-approval is also a letter from a lender saying it’s generally willing to lend to you, up to a certain amount and based on certain assumptions. Some lenders only issue a pre-approval based on verified information, not just what you report.
A pre-approval helps you make an offer, because it gives the seller confidence that you’ll be able to get financing. It’s not a guaranteed loan offer, and it doesn’t mean you’ve already been approved for a mortgage.
Lenders use these two words differently, and the Consumer Financial Protection Bureau says not to worry about which word yours uses. Ask what your lender actually checked, and ask your real estate agent whether the letter will be taken seriously in your market.
Many people wait to get a pre-approval until they’re ready to start shopping seriously for a home. Getting one earlier can be a good way to spot problems with your credit in time to fix them.
Earnest money
Earnest money is a deposit you make on a home you want to buy. It’s also called a good faith deposit, because it shows the seller your offer is serious.
On the standard Texas contract, you deliver it to the escrow agent named in the contract, who holds the money for the deal, within 3 days after the Effective Date, which is the date of final acceptance written on the contract. Miss that deadline and, until you deliver it, the seller can end the deal or use the contract’s default remedies. The form leaves the amount blank, so it’s set in your offer.
What happens to it depends on how the deal ends. Three of the ways it can go:
- If you close, it goes first to any cash down payment, then to your expenses, and any excess is refunded to you.
- If you terminate on time during the option period, it’s refunded. The same goes if you terminate on time under the Third Party Financing Addendum, which we cover under Appraisal.
- If you fail to comply with the contract, you’re in default. The seller can end the deal and keep the earnest money, or hold you to the contract and seek other relief the law allows.
Option money
Option money is a fee you pay for the right to terminate the contract for any reason within a fixed, stated period of time, called the option period. The Texas contract calls it the option fee. You and the seller agree on the amount.
It goes where the earnest money goes: you deliver it to the escrow agent, made payable to the escrow agent, within 3 days after the Effective Date. You don’t hand it to the seller or the seller’s agent. If the last day lands on a Saturday, Sunday or legal holiday, you get until the end of the next day that isn’t one.
Don’t miss it. If no dollar amount is stated, or you don’t deliver the fee on time, you lose the unrestricted right to terminate.
The escrow agent can release the fee to the seller at any time without asking you, and you don’t get it back if you terminate. If you close, it’s credited to the sales price.
Option period
The option period is a specific number of days, negotiated between you and the seller, during which you can get the home inspected and you have the right to terminate the contract for any reason. The days count from the Effective Date, and the period should be long enough to allow the home to be inspected and you to negotiate repairs with the seller.
Your written notice of termination has to be given by 5:00 p.m., local time where the home is located, on the last day of the option period. That deadline doesn’t move for a weekend or legal holiday, even though the deadline for delivering the fee does.
Repairs you negotiate go into a written amendment to the contract. The clock doesn’t stop while you talk, so settle them, or terminate, before 5:00 p.m. on the last day. Our guide to the Texas option period goes through the deadlines.
Inspection
A home inspection is an examination of the current condition of a home, from foundation to roof. You can use your option period for it, so you still have the right to walk away if it turns up something you can’t live with.
Texas inspectors are licensed by the Texas Real Estate Commission and follow its Standards of Practice. A licensed inspector will assess the structure and the heating and cooling systems, plumbing, electrical work and appliances, and report anything from a loose outlet cover to a non-functioning AC unit.
A standard inspection doesn’t cover everything. The inspector isn’t required to determine whether termites or other wood-destroying insects are present, or whether there’s mold. If you want pests checked, that’s a separate inspection by someone licensed to do it.
After the inspection, you can ask the seller to do repairs, negotiate the terms of purchase, or both, and your agent can help you decide which. Get whatever you agree to in writing before 5:00 p.m. on the last day of the option period, while you can still terminate.
Appraisal
A home appraisal is a professional opinion of what a home is worth, and it’s a different job from the inspection. The inspector works for you. The appraiser is an independent professional whose job is to give the lender an estimate of the home’s market value. In most cases, your lender picks the appraiser.
The report is based on things like recent sales of similar homes and aspects of the home (floor plan, square footage, amenities). You’re entitled to a copy before closing. The option period doesn’t wait for the appraisal, so yours may arrive after that window has closed.
If the appraisal value is at or above the contract price, the transaction continues as planned. But when the appraisal value comes in below the contract price, it can delay or derail the transaction.
A lender sizes the loan against the lower of the price or the appraised value, so a low number usually means a smaller loan and more cash from you. You can use the low appraisal to negotiate with the seller to lower the price, and the seller can say no.
Once the option period is over, a low number alone doesn’t let you out of the Texas contract unless your contract says so.
If your contract has the Third Party Financing Addendum, the form that covers your loan, it may let you terminate and get your earnest money back, but only on the conditions and deadlines printed in it. Read that form, and any appraisal addendum in your contract, with your agent as soon as the number comes in.
If the number comes in low, your agent should help you decide whether to ask the seller for a lower price, cover the difference in cash, or, if your contract gives you the right to terminate, move on to the next home. Our guide to what happens when the appraisal comes in low in Texas goes through the options.
Closing
Closing is the final step of your real estate transaction. This is the time when money and documents change hands: the seller signs over a deed conveying the home to you, and you pay the sales price. Cue the celebration!
Your contract sets a closing date, and the sale has to close on or before it, unless the contract extends it, as it can for problems with the title. If you need more time, say your lender is running behind, ask the seller for a written amendment, signed before that date, because failing to close on time can put you in default. The contract also says when you take possession, whether that’s upon closing and funding or under a temporary lease, so check that before you book the movers.
Your next step
You don’t have to memorize all of this. Just know which terms have a clock on them: the earnest money and option fee deliveries, the option period, the closing date, and, if your contract has the Third Party Financing Addendum, the deadlines in it.
If you’re buying in Fort Worth and want one of our agents beside you for it, schedule a Meetup: a conversation with our team at one of our offices, at your house or over a call. You can also read how we represent Fort Worth home buyers.
Selling too? Start with a free home valuation: one of our listing agents pulls the comparable sales by hand and gives you a price range for your house.
