Quick Takeaways on Earnest Money in Real Estate

  • The escrow process is designed to protect buyers and sellers during real estate transactions.
  • Earnest money is a payment from the potential buyer to the seller to show good faith in their intent to complete a real estate transaction.
  • If the buyer’s offer is accepted, earnest money goes toward the down payment and closing costs. If the sale falls through, buyers may be able to get some of the earnest money back depending on the circumstances.

Losing your earnest money is a hurdle in the homebuying process no homebuyer wants to face, but following the ten rules provided by Endpoint, as well as researching the topics on the rest of this page, should help put your earnest money deposit to good use!

The administration of escrow accounts can understandably be a confusing concept to first time homebuyers. According to The Balance, Escrow is a financial agreement in which a third party controls payments between two transacting parties and only releases the funds involved when all of the terms of a given contract are met. “Escrow is most commonly used when purchasing a home, though can be used in any financial transaction where a third party is necessary.

Earnest money refers to a payment made from a hopeful home buyer to the home seller to show. This payment is separate from the down payment, though it does usually get applied to the total down payment cost. Earnest money is placed in an escrow and is seen as a token of good faith from the buyer. It is often around 3% of the purchase price, or a rounded number like $5,000.

Unfortunately, each step in closing on a home, including escrow, is an opportunity for fraud. In the era of wire transfers, closing information sent via email, and online banking, you can never be too safe when depositing and/or transferring your money. If a fraudster convinces you to wire them money via a duplicate email address, there is often little you can do to get it back. Always confirm information and transfer deadlines with your bank, lender, and any other parties involved.

Though third parties are supposed to make the escrow process unbiased and safe, mishandling can occur. Unfortunately, large companies can make mistakes when distributing escrow, and dipping into company or customer funds is not an unheard of crime in the real estate world.

See References for more information.

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