One of the key steps between signing a home purchase agreement and closing the deal is managing the escrow process. This involves depositing money into an escrow account, a crucial safeguard for both buyers and sellers. If you’re navigating the homebuying journey, working with an experienced local agent can guide you through making an offer and ensuring your deposits are protected. 

Here’s what you need to know about escrow and earnest money deposits:

What is Escrow?

Escrow is a financial arrangement where a neutral third party—such as an attorney, title company, or escrow agent—holds and manages funds during the transaction. Most transactions on the Vineyard use the real estate agency’s or an attorney’s escrow account. These funds are only released when all conditions of the purchase agreement have been met. For homebuyers, the money placed in escrow is often applied toward the down payment and closing costs. 

What is Earnest Money?

Earnest money, also called a “good faith deposit,” is a sum paid by a buyer to demonstrate a serious commitment to purchasing a home. Massachusetts is a two contract state. Typically there are two separate documents signed prior to closing. Each of these documents include an earnest money deposit. The initial deposit paid with the initial offer is usually a fixed amount. This amount can and does vary depending on many factors. The second deposit is paid with the signing of the Purchase and sale and is typically based on a percentage of the sale price. Both are securely held in an escrow account until the transaction is finalized. It becomes a portion of the down payment, which directly contributes to the home’s purchase price. Earnest money serves as a form of assurance to the seller.

What Happens to the Earnest Money Deposit if the Sale Falls Through?

If the seller backs out of the transaction, the earnest money is typically returned to the buyer. Additionally, if contingencies outlined in the purchase contract—such as a failed home inspection, appraisal issues, or financing problems—cannot be resolved, the buyer may be entitled to a refund. However, if the buyer walks away for reasons not covered by contingencies, the seller may keep the deposit. To protect your investment, work closely with your real estate agent and a legal professional to fully understand the contract terms.

Is an Earnest Money Deposit Required?

While no laws mandate an earnest money deposit, it is a common practice in many real estate markets. Sellers often favor offers that include larger earnest money, particularly in a competitive market or when buyers are making a down payment of less than 20%. Some sellers may even require it as part of the offer process.

How Much Earnest Money Should You Offer?

The amount of earnest money can vary but typically ranges from 1% to 10% of the home’s purchase price. Factors influencing the deposit amount include market competitiveness, the buyer’s down payment, included contingencies, and the seller’s preferences. On the Vineyard, fixed deposit amounts are the norm with the offer contract rather than percentage-based deposits.

Are There Risks to Using an Escrow Account?

While escrow accounts provide security, homebuyers should remain vigilant against fraud, especially wire fraud scams. Protect yourself by:

• Verifying wire transfer instructions directly with your bank, lender, or escrow agent before sending any money.

• Avoiding email-based instructions unless confirmed through a secure method and by calling your agent prior to initiating a wire transfer.

• Consulting your real estate professional for guidance on safe financial transactions.

Final Thoughts

Escrow accounts and earnest money deposits are essential components of a secure homebuying process. Please feel free to contact me for assistance and to learn about local requirements.