If you have ever purchased a home, then you are likely familiar with the term “escrow”. For first-time home buyers this term can be confusing as it may have several different meanings. In a real estate transaction, escrow monies are held in an escrow account. In a home purchase contract this is often referred to as earnest money deposits. In putting these earnest deposits down, the buyer is demonstrating that they are a serious buyer for the property. In other words, the buyer has “skin in the game”. Should the buyer not follow through with the executed contract terms, these deposits could be put at risk.
Typical amount in escrow for a real estate transaction
The amount of money held in escrow for a real estate transaction may vary considerably based on your location, while they may be standard in some parts of the country. For most transactions, you can expect the amount of funds held in escrow to be between 1-5% of the property’s purchase price. For new home construction, it is not uncommon for builders to require 10% or even more to be held in escrow.
Who holds escrow funds?
Who holds the escrow funds may vary by location. In some cases, the listing broker may hold the escrow funds while a third party may hold escrow in other situations. For example, an escrow company or even a real estate attorney may hold the escrow.
Summary
Escrow funds are a critical aspect of any real estate transaction. Without these earnest money deposits, a buyer would be free to walk away from an executed contract with few to no repercussions. Therefore it is important to have a good understanding of escrow deposits both as a buyer and a seller. As always, it is important to have a knowledgeable real estate agent and real estate attorney on your team to guide you through any transaction.
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