Buying a home is an exciting journey, but it comes with important financial steps that every buyer should understand. Two key terms that often come up during the process are escrow and earnest money deposits. These financial safeguards help ensure a smooth transaction between buyers and sellers.
What is Escrow?
Escrow is a financial arrangement where a neutral third party—such as an attorney, title company, or escrow agent—holds and manages funds during a real estate transaction. The money is only released when all contractual conditions have been met.
Escrow accounts commonly cover:
Earnest money deposits
Down payments and closing costs
Property taxes and homeowners insurance
Earnest Money: A Good Faith Deposit
Earnest money, often called a “good faith deposit,” is an upfront payment made by the buyer to demonstrate their serious intent to purchase a home. This amount, usually ranging from 1% to 10% of the home’s price, is held in an escrow account until closing.
What Happens to Earnest Money If the Sale Falls Through?
Buyer Protection: If the contract includes contingencies—such as financing, appraisal, or home inspection—and those conditions are not met, the buyer typically gets their deposit back.
Seller Protection: If the buyer backs out for reasons not covered by contingencies, the seller may keep the deposit.
Is Earnest Money Required?
While not legally required, earnest money is a common practice, especially in competitive markets where multiple buyers are bidding on the same property. A strong earnest money deposit can make an offer more attractive to sellers.
Protecting Your Funds: Avoiding Wire Fraud
Homebuyers should be cautious when wiring money to an escrow account. Scammers target real estate transactions, so always confirm wire instructions directly with your trusted lender or real estate agent before making a transfer.
Work with a REALTOR® for a Secure Transaction
Every home purchase is unique, and working with a REALTOR® ensures you have expert guidance in protecting your earnest money and navigating the escrow process. If you're buying or selling a home, reach out to a local real estate professional to ensure a smooth and secure transaction.
For helpful guides and to find a REALTOR®, visit TheRMeansMore.com today!