Throughout a real estate transaction, there are many terms that you may not be familiar with although they play a significant role in the transaction for both buyer and seller. It is important to educate yourself when it comes to a sale as important as a home, and that’s where come in. The Birthright Title team loves talking and making sure you understand all the ins and outs of your closing. That’s why we wanted to take a look at two important “e” terms with you today: Escrow and your Earnest Money Deposit.
Escrow is so important many title companies include it in their name, and the word can come into play twice, once during your homebuying journey and again after you’ve closed on your home and start making payments.
First, when the sales agreement is signed, the buyer is required to put down what’s known as an Earnest Money Deposit – more on that in second. That EMD money goes into an escrow account. This account is held by a title company, attorney, or the listing broker. Once all contingencies are met and both parties are ready to close, the escrow officer will release the money in the escrow account.
Then, after the buyer closes and officially owns the property, they will pay into an escrow account with their monthly mortgage payment. This money is taken out monthly and put into an escrow account to pay for property taxes, homeowner’s insurance, and if needed, mortgage insurance.
The second term is Earnest Money Deposit. Also known as a good faith deposit. This is money put down by the buyer as soon as the sales agreement is signed. It is typically 1-2% of the sales price of the property. This money is held in an escrow account until the closing when it is released and applied to the down payment and closing costs.
Should there be any issues with the property found during an inspection or a title search, the buyer will typically be given the earnest money deposit back and be allowed to drop out of the sales contract. However, if a buyer decides that they no longer want to purchase the property for any reason other than an issue with the property, the seller gets to keep the money. Of course exceptions are made, but this is generally why sellers are more attracted to offers with a higher Earnest Money Deposit: It shows that the buyer is serious and if they do drop out the seller will be compensated.
Of course, there are plenty of other terms homebuyers, and sellers, will encounter during the journey to a new home. That’s why it’s important to surround yourself with trusted real estate professionals. Our team is all about educating, so if you have any questions about title or the closing process, we’re here to answer them. Reach out to us today! In addition, you can check out ALTA’s homeclosing101.org for a comprehensive real estate glossary by clicking here.