Escrow and Earnest Money FAQ – Fact or Fiction

Updated 02/27/2023.

“Escrow” is a multifaceted and hard-working term in the realm of real estate. It’s a process (or is it a period of time? We’ll answer that question in a minute.) that holds a number of pitfalls for first-time home buyers and sellers. But on the other hand, even experienced real estate agents and home sellers at times fall for well-circulated escrow and earnest money myths. In this article, we’ll break down some of the “facts and fictions” you’re most likely to come across when it comes to escrow and earnest money in 2023.

Fact or Fiction? “Escrow” refers to a bank account, not a period of time, so you shouldn’t say, “in escrow”.

Fiction! Escrow is both – in fact, you could say that escrow is three things:

• A type of bank account. An escrow account is a temporary account held by an escrow company. For the purposes of real estate transactions, the buyer can have their money held by a trusted third party (an escrow company like Fidelity National Title). Meanwhile, the seller can proceed with the sale confident that the earnest money and down payment are waiting for them in the escrow account and will be released to them when the deal closes (along with the rest of the funds, either from the cash buyer or their lender). The buyer can also be confident that the money is protected if the sale falls through (more on that later).
• A contractual agreement. Having money in escrow to buy a home means that the seller must complete their end of the bargain — getting the home inspected, potentially negotiate repairs, completing the repairs, and having the title inspected as well – essentially fulfilling the requirements of the sales agreement. When real estate agents say a home is “in escrow”, we mean it is sold unless the buyer or seller backs out of the deal (which can happen for a number of reasons). Some factors that could lead to the termination of an agreement include a failed inspection, a lack of financing, or a disagreement on which repairs are needed on the home. If that does happen, you’ll often hear that a home “fell out of escrow”. 
• A time period. Usually, escrow lasts about 30-45 days. The word “escrow” is sometimes simply used to refer to this period of time, i.e., “Let’s wait until escrow is over.” Essentially, when the conditions outlined above have been completed, the home will officially be sold and the escrow period will come to an end.

Fact or Fiction? You should always call to check money wiring instructions from your escrow company, even if you get an email directly from the title company or your real estate agent.

Fact! Scam alert: In 2021 (the most recent year for which the FBI has published data), there were more than 11,500 victims of real estate wire fraud in the United States, and the total amount of money lost was more than $350 million. That is an $100 million increase from 2020. Hackers can gain access to the email accounts of your real state agent, or mortgage broker, escrow or title officer, and ask you to wire money to an account, which of course is not the actual escrow account, leading to a huge financial loss for their unsuspecting victims. With fraud continually on the rise, be sure to call the person who appears to have sent the email and confirm the wiring account number. And when you call, be sure to use a trusted phone number you’ve already used to contact your title/escrow agent, not the contact number in the suspected email. For more tips on avoiding escrow-related wire fraud, check out this advice from Fidelity National Title. The article provides some good insight into this type of fraud, including helpful tips on how to prevent fraud and how to protect yourself from real estate scams.

Fact or Fiction? If you’re not using a real estate agent, it’s okay to give the earnest money directly to the seller.

Fiction! Never give earnest money directly to the seller. Not only is it likely illegal, but it’s a sure way to never see your money again. Buyers: Even if you’re opting to buy without a real estate agent, always use an escrow company. It’s the only way to ensure that you can get your earnest money back should you need to walk away from the deal — or the seller fails to uphold their end of the contract. There are valuable protections in place when you use an escrow company that you would miss out on by not using the service. In addition to the peace of mind provided by a third party overseeing and ensuring a smooth transaction, the company will also make sure you have completed all the proper documents to officially close the sale.

Fact or Fiction? Earnest money is the same as a deposit.

Fact! The terms “earnest money”, “deposit” and “escrow deposit” are used interchangeably. All of these are simply referring to the cash that a home buyer puts forward when they make an offer on a home, which then gets deposited into an escrow account. The principle behind this practice is to demonstrate that the offer is made in good faith. The deposit is what secures the initial agreement to buy a home.

Fact or Fiction? Earnest deposits are due only when the seller accepts an offer.

Fact! When you and your real estate agent write up an offer, it includes the amount offered in earnest. Only after the seller accepts the offer are you required to write a check to the escrow company, putting your earnest deposit in a temporary account for safekeeping until the deal closes. If the seller does not accept your initial offer, you have no obligation to send money to an escrow company.

Fact or Fiction? Once earnest money is deposited, there’s no way to get it back. 

Fiction. Most home purchase agreements provide ways for both the buyer and seller to back out of the deal, and typically allow the buyer to get their earnest money back in full if the deal falls through. For example, most home offers are contingent on the inspection: if the home inspector discovers a major problem with the home, the deal can be called off, and the buyer will get their earnest money back. Another reason the buyer could receive their earnest money back is if the home is appraised below the agreed-upon value. Finally, earnest money could be refunded if financing for the property fell through and there was no way for the buyer to finance the property. Of course, the buyer can back out of the agreement at any point before the closing, and for any reason. The one caveat to this is that if the given reason was not outlined in the contract, there is unfortunately no guarantee of receiving earnest money back. 

Fact or Fiction? Escrow accounts aren’t just for real estate transactions. 

Fact! An escrow account is a temporary account that can be set up any time there are multiple interested parties involved in the transfer of a large amount of money. When you purchase a home, you use a single escrow account — holding the earnest deposit and down payment in the account until the deal closes. However, unless it’s an all-cash transaction, most home buyers finance the purchase of a home using a lender. The home lender will often keep money in a new escrow account to cover the costs of the mortgage, for example, property tax and insurance. This is why mortgage payments are often referred to as PITI — Principle, Interest, Taxes and Insurance. So closing on a home doesn’t always mean you’re done with escrow.

Fact or Fiction? The seller always pays the fees associated with the escrow account, as in title fees, etc.

Fiction! Either party can pay for these expenses. But local contracts and even local governments have a say in who pays what in a real estate transaction. In Oregon, the sellers have their own separate closing costs, as do buyers. These costs are set by the state, but there are others that are negotiable and set by local contracts and tradition. Much of the final costs depend on the contract that is agreed upon between the buyer’s and the seller’s real estate agents. This is why finding and working with an agent who is a skilled negotiator is essential. For more insight into how closing costs break down for buyers and sellers in Oregon, read our report where we go in to more detail on common scenarios. Our advice is to be sure you are familiar with every portion of your agreement to purchase or sell a home before closing.

To Avoid Escrow Pitfalls, Work with an Expert Realtor

Looking for an experienced buyer’s or seller’s agent in Portland? Our top 1% buyers team would be happy to answer all your questions and work on your behalf to ensure the best possible experience in purchasing your new home. Or if you are looking for professional marketing and expert guidance to sell your home for the best possible price, contact our top 1% seller’s team. You’ll be glad you did!