Real Estate FAQ: Earnest Money, Escrow, and more
Buying or selling a home is different than a car or your old baseball card collection. 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. Here are the most common questions a Portland real estate agent gets about the earnest money and escrow process.
Q: What is the difference between an earnest money payment and a down payment?
A: Good question! Basically, an 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 during the escrow process. Usually, the earnest money deposit is 1-3% of the purchase price, with 1% being the most common, but nothing is written in stone here. That’s because earnest money is written into the home offer “in earnest”, meaning it’s a signal to the seller that the buyer is serious about purchasing the home. The buyer can get that money back if one of the contingencies in the offer is not met, but that doesn’t include changing their mind about buying the home. 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.
Both earnest money and down payments go toward paying off the full amount of the home’s purchase price. Earnest money is not a fee, although escrow services that hold the earnest money do charge fees. These are typically split between the buyer and seller, but be sure to budget the associated fees in to your 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 don’t want to give the earnest money directly to the seller. 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 act as a neutral independent party. Quick warning: some agreements list the seller’s real estate agent as a beneficiary of lost earnest money! That’s not how my team operates. Although it’s inevitable that some real estate sales will not be successful if the buyer loses their earnest money we always give 100% of it to the seller and don’t take a cut.
Q: Is it best to offer a big earnest money deposit if I can?
A: Certainly, higher earnest money deposits appeal to home sellers, but as a real estate agent, I never recommend offering earnest money in an amount higher than $10,000. Why? If there is a legal dispute over the earnest money, amounts over $10,000 cannot go 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. My top 1% buyer’s agent is certified in high-level negotiation tactics.
Q: What else does the escrow company do?
On the surface, the escrow company’s job is to hold the earnest money deposit, but this is just the beginning. 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. They make sure all of the other agreements of the sales contract are also met, including the title check. When it’s all said and done, they prepare a Closing Statement to tie up all the loose ends.
Q: How long does a home have to be in escrow, in Oregon?
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. In the case of cash sales, the escrow period can be shorter, but generally, banks and other lenders have a minimum escrow period to facilitate their processes.
As a home buyer or seller, the best thing you can do during the escrow process 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.
Q: How do I find a good escrow company?
Ask your real estate agent! Having an experienced and efficient escrow officer can make the difference between an unnecessarily long and arduous closing process, and one that is on-time and relatively pain-free. As a Portland buyers’ and sellers’ team, we work closely with many of the escrow companies across the region. Some are preferred, and some are not — yet another reason to use a real estate agent with history and experience in the Portland area.
Q: What do I need to do at closing?
At the end of the escrow period, there’s what called “the closing”, when the home buyer and the seller (separately), get together with the escrow officer to sign the final paperwork. Typically both the buyer and seller must sign in front of a notary. Often the title company can send that notary to your home or your place of business with advance notice (but usually the title company will charge for this convenience). The main thing to do is show up with your ID and sign the paperwork. Your real estate agent will advise you on what else to bring or do beforehand depending on the transaction.March 2, 2018