Escrow Explained: What Happens to Your Money Between Contract and Closing

Escrow is the legal arrangement by which a neutral third party — an escrow officer, title company, or attorney depending on the state — holds funds and documents during a real estate transaction until all conditions of the contract have been satisfied. Understanding escrow architecture removes the anxiety that many first-time buyers feel when writing a large check to a company they have never met before.

Earnest money is the buyer's initial deposit, typically 1–3% of the purchase price, submitted within 3–5 days of the accepted offer. It demonstrates the buyer's commitment to the transaction and is held by the escrow company or listing brokerage in a trust account. It is applied toward the down payment and closing costs at closing — it is not an additional cost but an advance of funds already needed.

Earnest money is subject to forfeiture if the buyer defaults on a contract without a valid contingency escape. Valid contingencies — inspection, financing, and appraisal contingencies — are contractual provisions that allow the buyer to exit with their earnest money returned if specific conditions are not met. Waiving contingencies to make an offer more competitive means waiving these protections. Understanding exactly what you can exit for free and what would cost you your deposit is essential before making an offer.

Closing costs are separate from the down payment and represent the fees and taxes required to transfer ownership and fund the loan. For buyers, total closing costs typically range from 2–5% of the loan amount. Major components include: origination and discount points, title insurance (owner's and lender's policies), escrow and settlement fees, prepaid interest (from closing date to end of month), and property tax and insurance escrow funding.

The Loan Estimate, delivered by the lender within 3 business days of application, itemizes all projected closing costs in standardized format. The Closing Disclosure, delivered at least 3 business days before closing, shows the final amounts. Comparing these two documents line by line and questioning any increases is the buyer's primary tool for ensuring they are not surprised at the closing table.

Seller credits — often called "seller concessions" — are funds that the seller agrees to contribute toward the buyer's closing costs as part of the negotiation. In a buyer's market or when a property has been on the market for an extended period, requesting seller credits is a reasonable negotiating position. Conventional loans allow up to 3% in seller credits when the buyer puts down less than 10%, and up to 9% for larger down payments.