What is an Escrow Deposit in a Real Estate Transaction?

In real estate transactions, the term “escrow deposit” often arises, playing a pivotal role when buying or selling a home. So whether you’re a buyer, seller, or agent navigating the intricate world of real estate and understanding the concept of an escrow deposit is crucial. Let’s take a closer look and answer the question of what is an escrow deposit in a real estate transaction along with several other escrow deposit questions.

Escrow Deposits Explained

What is an Escrow Deposit? 
An escrow deposit in a real estate transaction, also known as an earnest money deposit, is money that a homebuyer puts down as a sign of good faith when purchasing a home.

When is the Escrow Deposit Collected?
When an escrow deposit is collected ultimately depends on the offer itself. A majority of real estate contracts have three options for a buyer to choose from.

1. It accompanies the buyer’s offer
2. Collected within “X” days after seller acceptance

Most homebuyers choose option #2 as opposed to option #1 because once an escrow check is collected it must be deposited into an escrow account. So if a buyer were to choose option #1 and their offer wasn’t accepted their escrow deposit may have already been deposited. Therefore, getting it back immediately may not be an option. While choosing #2 the escrow deposit will only be collected and deposited if the buyer and seller come to terms.

Where Does the Escrow Deposit Go?
The buyer’s escrow deposit is usually held by the listing or selling real estate brokerage, title company, or attorney and will be applied toward the buyer’s closing costs.

How Much Does a Buyer Need to Put in Escrow?
The amount of an escrow deposit varies, but the average is 2% to 3% of the purchase price. However, typically not all of it is collected upfront. There is usually a small initial deposit collected, like $1,000. Then the balance of the remaining escrow deposit will be collected 7-15 days later after the effective date of the contract.

Do Buyers Have to Put Down an Escrow Deposit?
No, a buyer does not have to put down an escrow deposit. However, it’s unlikely a seller will accept an offer without one. The escrow deposit serves as a form of security for the seller, assuring them that the buyer is serious about the transaction and has the financial means to proceed.

Even if a buyer is obtaining 100% financing they will still have closing costs that need to be paid at closing. So a buyer can put money in escrow and use those funds for their closing costs at closing. In the event, the seller agrees to cover all the buyer’s closing costs and they’re obtaining 100% financing, it is still common for sellers to request an escrow deposit from the buyer.

By placing funds in escrow, the buyer demonstrates their seriousness and dedication to fulfilling their contractual obligations, as defaulting on the agreement could result in the loss of their deposit. Without an escrow deposit, the buyer may not face any immediate consequences unless the seller decides to take legal action for non-performance, which isn’t very common. So having an escrow deposit in place usually provides the seller with confidence to move forward with the buyer’s offer.

Can a Seller Keep a Buyer’s Escrow Deposit?
Yes, if the buyer fails to meet certain contractual obligations or breaches the agreement, the seller may be entitled to keep the escrow deposit as compensation for damages incurred.  However, it ultimately depends on the contract along with the applicable laws and regulations.

If the buyer only has a 30-day financing contingency and within those 30 days they are denied for a mortgage the escrow will most likely be returned to the buyer. However, if the homebuyer is approved for financing and on the 35th day the buyer decides to back out of the contract the seller will most likely be entitled to the buyer’s escrow deposit. Once again it all depends on the terms outlined and agreed to in the contract as well as applicable laws and regulations.

Can the Escrow Company Release the Escrow Deposit to the Buyer or Seller?
Escrow can’t be released to either party without a signed release and cancelation, which both the buyer and seller must agree to and sign. The release and cancelation will spell out who is getting the escrow deposit and how much of the escrow deposit they will be getting. Once again both the buyer and seller have to agree and sign the escrow lease, if one party refuses to sign the release the money will remain in escrow until the next steps are taken, which will depend on the terms of the contract.

Now, if a real estate brokerage or another company is holding escrow but not conducting the closing they can release escrow to the closing company. In most cases, an escrow request form will need to be completed so the brokerage holding the deposit knows where to send the money. However, it’s unlikely the buyer and/or seller will have to approve the escrow deposit being transferred to the closing company. The brokerage cannot release the escrow deposit to the buyer or seller without an executed release and cancelation.

Final Thoughts

Understanding the concept of an escrow deposit is crucial for anyone involved in a real estate transaction. Whether you’re a buyer, seller, or real estate agent, recognizing the purpose and significance of an escrow deposit is a must in the home buying and selling process. While the specific requirements and conditions regarding escrow deposits may vary, being well-informed and understanding the ins and outs of what is an escrow deposit and how important it is will help all parties involved.

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Popular Questions About Escrow Deposits

Escrow deposit vs earnest money, what’s the difference? In most cases, escrow deposits and earnest money deposits are one and the same and the terms are interchangeable. Both refer to the deposit a home buyer puts down when submitting an offer on a home.

Is escrow deposit refundable? Whether or not an escrow deposit is refundable will depend on the terms outlined in the real estate contract. Typically, if the buyer is within their contingency period they may be entitled to receive their entire escrow deposit back depending on the contingency. However, if the buyer defaults on the contract that may not be the case. It’s important for all parties to understand what an escrow deposit is and who is entitled to it if the sale doesn’t close.

What is an escrow account in a real estate transaction? An escrow account, in the context of real estate a real estate transaction, refers to a specialized account where funds are held by a neutral third party, typically an escrow agent or title company, during a real estate transaction. The purpose of an escrow account is to ensure the secure handling and disbursement of funds between the parties involved in the transaction. It acts as a safeguard, providing protection and assurance for both the buyer and the seller.

Is escrow deposit the same as down payment? No, an escrow deposit is not the same as a down payment. An escrow deposit, also known as earnest money, is a sum of money put down by the buyer as a show of good faith and commitment to the real estate transaction. While a down payment is a significant component of the overall financing for the property and is typically a percentage of the purchase price, often determined by the buyer’s mortgage lender. While the escrow deposit and down payment serve different purposes, they both play important roles in the purchase of a property.

About the Author

Top Wellington Realtor, Michelle Gibson, wrote: “What is an Escrow Deposit in a Real Estate Transaction?”

Michelle has been specializing in residential real estate since 2001 throughout Wellington Florida and the surrounding area. Whether you’re looking to buy, sell, or rent she will guide you through the entire real estate transaction. If you’re ready to put Michelle’s knowledge and expertise to work for you call or e-mail her today.

Areas of service include Wellington, Lake Worth, Royal Palm Beach, Boynton Beach, West Palm Beach, Loxahatchee, Greenacres, and more.

What is an Escrow Deposit in a Real Estate Transaction?