Earnest Money, Down Payments, and Escrow: The Money You Hand Over Before Closing

Earnest Money: Your Good-Faith Deposit

Once a seller accepts your offer, you'll usually have 24 to 72 hours to submit an earnest money deposit — a check or wire transfer that signals you're a serious buyer, not a tire-kicker. Think of it as putting skin in the game.

Earnest money amounts vary by market, but 1% to 3% of the purchase price is a common range. In highly competitive markets, buyers sometimes offer more to stand out. The funds go into a neutral escrow or trust account — not directly to the seller — and sit there until the deal closes or falls apart.

Your purchase contract will include contingencies — conditions that must be met for the sale to proceed. Common ones include a home inspection contingency, a financing contingency, and an appraisal contingency. If the deal collapses because a contingency isn't satisfied, you are generally entitled to your earnest money back. Walk away without a valid contingency, and the seller may keep it.

For a fuller picture of what your agent can do to protect your interests — including negotiating contingency terms — see our article on working with a buyer's agent.

Down Payments: Your Ownership Stake at Closing

The down payment is the lump sum you contribute from your own funds at the closing table. It represents the portion of the home's purchase price you're not financing through a mortgage. If you're buying a $350,000 home with a 10% down payment, you're bringing $35,000 — and borrowing the remaining $315,000.

Down payment requirements depend heavily on your loan type:

• Conventional loans: As low as 3% for qualifying first-time buyers, though 20% avoids private mortgage insurance (PMI).
• FHA loans: 3.5% minimum for borrowers with a qualifying credit score.
• VA and USDA loans: No down payment required for eligible borrowers.

A common misconception is that 20% down is always required. That's not true — and home buying myths like this one can prevent qualified buyers from even attempting to enter the market. Down payment assistance programs also exist at the state and local level for income-qualifying buyers.

Your earnest money deposit is typically credited toward your down payment or closing costs at settlement, reducing the cash you need to bring on closing day.

Escrow: The Neutral Holder That Protects Everyone

Escrow is not a payment — it's a process and an account. During a home purchase, escrow refers to a neutral third-party arrangement in which a title company, escrow company, or attorney holds funds and key documents until all contractual conditions are satisfied. Neither the buyer nor the seller can access those funds unilaterally.

Once all contingencies are cleared, the lender funds the loan, the buyer brings their remaining cash, and the escrow officer disburses payments to all parties — the seller receives their proceeds, agents receive their commissions, and service providers receive their fees. The deed then transfers to the buyer.

After closing, escrow continues in a different form. Most lenders require an impound account (also called an escrow account) where a portion of your monthly mortgage payment is set aside to cover property taxes and homeowners insurance when they come due. This is separate from the transaction escrow used during the purchase.

All the fees that move through escrow at closing appear on your Closing Disclosure — a standardized document your lender must provide at least three business days before closing. For a line-by-line explanation of those charges, see our guide to closing costs decoded.

How All Three Connect at the Closing Table

Here's how the timeline typically unfolds:

1. Offer accepted: You wire your earnest money deposit into escrow within a few days.
2. Under contract: Contingencies are worked through — inspection, appraisal, final loan approval.
3. Closing day: You bring (or wire) the remainder of your down payment and closing costs. Your earnest money is credited against what you owe.
4. Escrow closes: Funds are disbursed, the deed is recorded, and you receive the keys.

Understanding these three pieces before you make an offer puts you in control. You'll know exactly how much cash to have ready, what protects your deposit, and who is holding your money at every step.

This article is for general informational purposes only and does not constitute financial or legal advice. Consult a qualified real estate attorney or licensed financial professional regarding your specific situation.