Earnest Money and Escrow- Real Estate Vocabulary Lesson

/ˈərnəst ˈmənē/ and /ˈeskrō/  Earnest money is the cash (usually a personal check) that is paid to the seller by the buyer upon acceptance of a contract to buy a home. The purpose is to provide a good-faith guarantee of the buyer’s seriousness about purchasing the home. Think of it kind of like a deposit.

The amount can vary, but I usually suggest about 1% of the sales price of the home. The check is deposited into the account of a third party (an escrow account) and held until closing day when it is applied to the down payment or closing costs.

When you hear people say that they are “in escrow,” it simply means that they have a contract to buy a home and that they have solidified the contract with a bit of cash to back it up.

What if something happens and the buyer can’t or won’t purchase the home?  Is earnest money always refundable? The answer is… yes and no. Depending on the wording of the contract (READ YOUR CONTRACTS!) earnest money is typically refundable if an inspector finds major defects in the home that the seller refuses to correct or if the buyer can’t obtain financing. If a buyer simply gets cold feet and changes their mind, earnest money is often not refundable. This makes it very important to be sure before signing a contract. It is not always easy to wiggle out later. This protects the seller by compensating them for lost time on the market.