What Is Escrow? (And How Earnest Money Works)

Escrow is an arrangement where a neutral third party holds funds or documents for a buyer and seller until agreed conditions are met, then releases them. In a Texas home purchase, a title company typically holds your earnest money in escrow and, at closing, disburses funds to the right parties. It exists so neither side has to trust the other with money directly.

There are two kinds. A purchase escrow holds earnest money until closing. A mortgage escrow (or "impound") account is one your lender keeps after closing: part of each monthly payment is set aside to pay your property taxes and homeowners insurance when they come due, so you are not hit with large annual bills. Your statement shows the escrow portion separately.

Earnest money is a good-faith deposit a buyer puts down when making an offer, showing the seller you are serious. It is held in escrow (not paid to the seller) and, at closing, is credited toward your costs — it is not an extra fee. If the deal closes, it counts toward your down payment and closing costs.

Earnest money is negotiable, but in the Austin area it is commonly around 1% of the purchase price (sometimes more in competitive situations) — for a $400,000 home that is roughly $4,000. There is no legal minimum; a stronger deposit can make an offer more competitive. The exact amount is set in your TREC contract.

Usually yes, if you back out for a reason your contract protects — such as during the option period, or if a financing, appraisal, or inspection contingency is not met within its deadline. It can be forfeited if you breach the contract or miss those deadlines. The Texas TREC contract spells out exactly when it is refundable; read it with your agent.

If you terminate within a window your contract allows, the earnest money is released from escrow back to you, typically after both parties sign a release. In Texas the title company will not release disputed funds until buyer and seller agree (or a court decides), so timing depends on everyone signing off. If the sale closes, it is simply applied to your costs instead of refunded.

Earnest money is a smaller good-faith deposit made when you make an offer, held in escrow. The down payment is the larger sum (a percentage of the price) you bring at closing to fund the purchase alongside your loan. Earnest money is not extra — at closing it is credited toward your down payment and closing costs.