Earnest Money and Escrow: What Homebuyers Need to Know

Earnest money and escrow are among the first unfamiliar terms many buyers encounter. They are related, but they do not mean the same thing.

What Is Earnest Money?

Earnest money is a deposit a buyer makes after entering into a purchase agreement to demonstrate that the buyer is serious about purchasing the property. It may also be called a good-faith deposit, purchase deposit, or earnest money deposit (EMD). The amount is normally negotiated as part of the offer and purchase agreement.

Earnest money is not an additional fee charged by the mortgage lender and it is not the same thing as the down payment. It is generally accounted for as part of the transaction at closing.

Where Does the Money Go?

The purchase contract identifies who will hold the funds. Depending on local practice, that may be a real estate brokerage, attorney, title company, settlement company, or another authorized escrow holder.

Is Earnest Money Refundable?

Sometimes. Refundability depends on the purchase agreement, the reason the transaction is terminated, and whether the buyer complied with applicable deadlines and contingencies. Financing, appraisal, inspection, title, condominium-document, insurance, and other contingencies may provide contractual protections. The exact contract language matters.

Your Lender May Need to Verify the Deposit

Mortgage underwriting may require documentation showing the amount deposited, where the money came from, and that the deposit cleared the buyer’s account. Keep receipts, copies of checks or wire confirmations, bank statements, and documentation from the escrow holder.

Earnest Money vs. Mortgage Escrow

Transaction escrow refers to funds held during the purchase. Mortgage escrow usually refers to an account maintained after closing for expenses such as property taxes and homeowners insurance.

Protect Yourself From Wire Fraud

Never rely solely on emailed wiring instructions. Independently call a known telephone number and verify the recipient, financial institution, and account information before sending funds.