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What are earnest money and escrow in real estate purchases?

On Behalf of | Dec 23, 2022 | Real estate transactions

Residential real estate transactions are complex undertakings that involve several steps. Understanding each step and what happens during them is crucial if you buy or sell a home.

Two concepts often the source of questions are earnest money and escrow.

What is earnest money?

Earnest money is a deposit that’s made to the seller when they accept a buyer’s offer. It’s meant to show the seller that the buyer is serious about the purchase. While it is often possible to use a check or money order to pay the earnest money deposit, digital transfers are the most common now. Once the seller receives the earnest money deposit, the real estate transaction can move forward.

What is escrow?

Escrow means that a third party holds money for two other parties until a transaction is completed. In real estate, your earnest money is held in escrow. Other money may also be placed in escrow and released to the buyer when specific conditions of the sale are met.

Your mortgage company may also hold money in escrow for taxes and homeowners insurance if the money for that is collected when you pay your mortgage. The money is taken out of the escrow account to pay for the insurance and/or taxes so you do not have to worry about making those payments.

Understanding your rights and responsibilities during real estate purchases is crucial. It is often difficult to keep track of everything yourself, so working with a specialized real estate attorney who can assist you may make the process easier. This is especially important when you are dealing with contracts for the transaction.