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What is Earnest Money and Escrow?

September 13, 2011 Leave a comment

I’ll be honest, I had no clue what earnest money or escrow meant until I started my career in real estate. When buying a home, most people don’t realize they need to submit earnest money, how much, and where it goes. I will help answer those questions today.

Earnest money is  simply an initial down payment that isn’t cashed until closing, letting the bank and seller know that you are truly interested in buying their house. It demonstrates that you have sincere interest about buying the house, and is usually about $1,000, but when dealing with larger priced homes, can be as much as 1% of the price of the home. Earnest money is submitted with the offer to buy someone’s house, and once that offer is accepted, the earnest money check is sent to a title company, which puts the money into an escrow account.

The escrow account is where the money sits until further notice. Just think of it as a savings account that a third-party holds until you close the contract. The third-party is usually a title company, since they are responsible for handling the money and transfering the deed of the house.

Some buyers worry that they will never see their earnest money check if they decide to cancel the contract and find another house. You can get your earnest money back if you cancel the contract for a legitimate reason, like an unacceptable condition found during inspections. If inspection comes back with extensive mold damage that you didn’t notice when you made your offer, then you have about 5 days to decide whether you want to renegotiate the price or back out of the contract. In that case, that is a legal cancellation, and you will get your money back.

I hope that helps clear things up. Let me know if you have any questions!

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