What is Escrow and Why Should it Matter to me?

Buying real estate whether a home or land is a big financial step, and one key part of the process is escrow. If you’re new to real estate transactions, you might wonder what escrow is and why it matters. Let’s break it down in simple terms.

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 between the buyer and seller. These funds are only released once all contract terms are met.

As a buyer, the money you put in escrow will typically go toward your down payment and closing costs once the deal is finalized. Escrow accounts may also cover ongoing expenses like property taxes and homeowners insurance.

What Is Earnest Money?

Earnest money, sometimes called a "good faith deposit," is an upfront payment made by a buyer to show they are serious about purchasing a home. This deposit is usually a percentage of the purchase price or a set dollar amount, held safely in an escrow account until closing.

Important: Earnest money is not the same as a down payment. The down payment is a larger sum applied directly to the purchase price of the home at closing.

What Happens to Earnest Money If the Sale Falls Through?

The fate of your earnest money depends on the circumstances:

• If the seller cancels the deal, the money is returned to the buyer.

• If the deal falls apart due to unmet contingencies (e.g., failed inspection, appraisal issues, or financing troubles), the buyer gets their deposit back.

• If the buyer backs out for reasons outside the contract terms—such as changing their mind—the seller may be allowed to keep the earnest money.

To avoid losing your deposit, always work closely with your real estate agent and review contract details carefully.

Is an Earnest Money Deposit Required?

While there’s no law requiring an earnest money deposit, it’s a common practice—especially in competitive housing markets. Sellers may prefer offers that include earnest money, as it demonstrates commitment to the purchase.

How Much Earnest Money Should You Offer?

The amount of earnest money varies, but it typically ranges from 1% to 10% of the home’s price. Factors that influence the deposit amount include:

• Market competition

• Your down payment size

• Contingencies in your offer

• Seller preferences

  
  

Is There Any Risk in Using an Escrow Account?

Escrow is generally a safe way to handle funds during a home purchase, but wire fraud is a risk. To protect yourself:

• Verify wire instructions in person or over the phone with your bank, lender, or escrow company before transferring any funds.

• Work with trusted professionals and avoid responding to unexpected emails requesting financial information.

Give us a call to learn more!