Real Estate FAQ: Earnest Money, Escrow, and More

Buying or selling a home is a complex, multi-step process. After an offer is accepted, the home goes into escrow to protect the interests of both the buyer and the seller, as well as the earnest money put down by the buyer. All of the different terminology and various steps can be a bit confusing, especially for a first time home buyer or someone who hasn't conducted a real estate transaction for several years. I understand! Below, I've answered some of the most commonly asked questions about the escrow process.

Q: What is the difference between an earnest money payment and a down payment?

A: Good question! Basically, earnest money, also known as a deposit, is the amount of money put down on a home when a purchase agreement is first mutually agreed to. A down payment, on the other hand, is made at the end of the escrow process. Usually, the earnest money deposit is 1-3% of the purchase price, with 1% being the most common amount. Earnest money is written into the home offer “in earnest," signalling to the seller that the buyer is serious about purchasing the home. The buyer can have that money refunded if one of the contingencies in the offer is not met; however, if they simply change their mind about purchasing the home, the money would be forfeited. For example, if the home inspection reveals a significant issue, and the purchase was contingent on inspection, the buyer can get their earnest money back in full.

If the home offer is accepted by the seller, earnest money is rolled into the down payment amount due, or used to cover closing costs.

Q: Why do I need to use an escrow company? Can’t I just give the earnest money directly to the seller?

A: You (the home buyer in this case) definitely do not want to give the earnest money directly to the seller, for a multitude of reasons. Escrow companies exist to protect your deposit and act as a neutral party. If the seller wants to pull out of the deal, they don’t get to keep the earnest money (unless the buyer has not held up their end of the contract). In the event that the deal falls through, the escrow company either returns the money to the buyer or gives it to the seller, depending on the terms of the purchase agreement. They are an essential part of a real estate transaction.

Q: Is it best to offer a big earnest money deposit if I can?

A: Higher earnest money deposits can definitely appeal to home sellers; however, as a real estate agent, I wouldn't recommend offering earnest money in an amount higher than $10,000. Why? If there is a legal dispute over the earnest money, dollar amounts over $10,000 cannot be taken to small claims court. Always talk to your real estate agent about how much to offer in earnest money - an experienced agent will leverage the amount you can pay in earnest with other terms and conditions in the offer, to make it as tempting to the home seller as possible.

Q: What else does the escrow company do?

A: At the beginning of the real estate transaction, the escrow company’s main job is to hold the earnest money deposit, but as the sale progresses they take on a larger role. The escrow officer assigned to your home purchase will ensure that the sales contract or home purchase agreement is carried out to the letter. For example, if the purchase agreement requires that the seller pay half the closing costs, they will facilitate those transactions, giving specific instructions and providing confirmation of receipt of payment. They make sure all of the other agreements of the sales contract are also met leading up to and during closing. When it’s all said and done, they prepare a final Closing Statement to tie up all the loose ends.

Q: How long does a home have to be in escrow in Oregon?

A: It’s not just the escrow officer who has work to do during the escrow period. Your real estate agent will be actively following up on those purchase agreements, the seller will be packing up and moving, and the lender will be finalizing the loan on their end. All of this generally takes 30 - 40 days in our area, but there are many variables that can affect this timeline. For example, if issues come up with the title, the escrow period may be extended to resolve them. Sometimes cash sale transactions can move more quickly, but in the typical transaction, banks and other lenders have a minimum escrow period to facilitate completion of their processes.

As a home buyer or seller, the best thing you can do during the escrow process to ensure that it proceeds without delay is to stay in close contact with your real estate agent, loan officer, and escrow officer. They may need more information, signatures on certain documents, and confirmation of key details. The faster you can provide these items, the better!

Q: How do I find a good escrow company?

A: Ask me (or your real estate agent if I'm not representing you) for a recommendation! Having an experienced and efficient escrow officer can make all of the difference between an unnecessarily long and arduous closing process, and one that is on-time and relatively pain-free. As a real estate agent representing both buyers and sellers in the Portland area, I have worked closely with many of the escrow companies in the region, and I am happy to recommend companies that I know do a great job.

Q: What do I need to do at closing?

A: The escrow period comes to an end with the "closing." This is when the home buyer and the seller (separately) meet with the escrow officer to sign the final paperwork. This is also when the loan has funded and the down payment money is transferred. Typically both the buyer and seller must sign in front of a notary, which the title or escrow company will arrange. Your main responsibility is to show up with your ID and be ready to sign your name a bunch of times! Your real estate agent will advise you on what else to bring or do beforehand depending on the specific transaction.

That wraps it up for today. I hope this has been helpful and informative!

Always remember, I am here for you! If you have questions or need help with anything, I am just a phone call, text, or email away. Let's chat!

- Tiffanie ❤❤❤