Real Estate Lingo: Escrow & Earnest Money
When you sit down to write an offer on a home, one of the first things you’re going to talk about with your realtor is something called “earnest money”, which will be deposited into an “escrow account”. Your realtor will ask you to pull out your checkbook, and–wait, what?! You’re going to be paying for the house now?! Didn’t your realtor say they didn’t get paid until closing?! What is going on?!
Earnest money is a small investment into the purchase of the home you make up front. It demonstrates to the seller that you are serious about purchasing the home–serious enough to put your money where your mouth is. Sometimes you’ll hear it referred to as “good faith” money. The amount depends on what kind of property you’re purchasing, how attractive you want your offer to be, etc.
You then deposit that money into an Escrow account. This is a bank account held by a third party (neither you nor the seller), at which point it belongs to both you and the seller–and neither you nor the seller, at the same time. You both have an interest in the money, and both have a claim to it at this time. This third party is typically your realtor’s brokerage if they have an escrow account (which we here at Disharoon Homes do), or your attorney.
The Escrow agent (or person in charge of the escrow account) will be in charge of holding the earnest money, but we can’t touch it without either signed agreement from both the buyer and seller (the two people who have a claim to the money) or a court order (if the buyer and seller can’t agree to where it goes, in case of the property purchase not going through). If the seller breaks the contract, the buyer can get their earnest money back and move on to the next home. If the buyer breaks the contract, the seller can keep the earnest money and put their home back on the market to sell to someone else. Whatever happens to it, everyone has to agree, or a judge has to decide. Otherwise, the money will stay in the account where no one can touch it–maybe even forever!
So, here’s how it works in most cases when you buy a home:
1. You give the earnest money check to your realtor, who either a) deposits it into their brokerage’s escrow account or delivers it to whomever the escrow agent will be for the transaction.
2. At the closing table, your earnest money becomes part of the cash proceeds the seller receives for selling their property. The earnest money isn’t an amount you pay in addition to the purchase price of the property; it’s more like a tiny down payment that gets included in the entire purchase now.
3. The seller signs the deed over to you, at which point you become the owner of the property and the seller relinquishes the title to your control.
There are many different kinds of escrow accounts that you’ll encounter through the purchase of the home. For example, many lenders will hold an amount of your monthly mortgage payment in an escrow account so they can pay your property taxes for you at the end of the year. They hold the cash for you–it isn’t their money, it’s yours. But you don’t have to worry about messing with it. They take care of the annoying stuff for you. Pretty neat!
If you still have questions, please feel free to ask us. That’s what we’re here for!