Do I Have to Put Money in Escrow When Buying a House?

When you buy a home, many thousands of dollars have to change hands and nobody wants to get cheated. Sellers often want "earnest money" from you before taking a house off the market, but you don't want them to take the money and run. The solution is to deposit the money with a neutral third party in an escrow account. You and the seller then know that neither of you can back out without losing access to the money.

The way escrow works in your community is guided by standard real-estate practices rather than hard-and-fast rules. Those practices determine whether the escrow agent is an attorney, a title company or a professional escrow company. Escrow begins when an account is set up and money is deposited. When you put up earnest money, that's the first deposit that goes in the account. Later in the closing process, your lender's mortgage loan goes into the account too.

Like the choice of escrow agent, escrow procedure varies with local practice. Generally, the escrow agent will track the progress of the sale as you and the home owner jump through your respective hoops: making any agreed-on repairs, paying for a title search, securing insurance. Escrow agent fees run to about 1 or 2 percent of the purchase price. You or the seller may wind up paying the fees, depending whether it's a buyers' or sellers' market, and depending on the standard procedures in your area.

When everything goes smoothly, the escrow agent shows up at closing and distributes the account funds. You get the deed and the agent closes the account. When things fall apart, the agent handles the money accordingly: if you get cold feet and decide not to buy, the escrow agent turns over your earnest money to the seller. If the title search turns up a fatal flaw that kills the deal, the lender withdraws its money from the account without any loss. and you receive your earnest money back. After the money's disbursed, the agent closes the account.