Who Owns the Earnest Money in Escrow?

Earnest money is a deposit made by the buyer as a show of good faith in a real estate transaction. Sponsoring brokers emphasize to their agents that once earnest money enters escrow, it is no longer the sole property of either party.

Why the Correct Option is Right

Option B is correct because the escrow agent is a fiduciary third-party stakeholder. They hold the funds in trust for the transaction. The buyer does not own them, and the seller does not own them. They can only be disbursed at closing (as a credit toward the purchase price) or upon mutual written agreement of both parties if the contract terminates.

Why the Other Options are Traps

• Option A is a trap because the buyer cannot unilaterally pull the earnest money back once deposited.
• Option C is a trap because the seller has no claim to the money unless the buyer defaults and both parties sign a release, or a court rules in the seller’s favor.
• Option D is a trap because title companies cannot use earnest money deposits to pay operational or search fees.

The Exam Trap

Watch out for default disputes. If a contract falls through, many agents think the title company can immediately give the money back to the buyer or seller. In reality, the title company is legally blocked from doing so until both parties sign Paragraph 18’s release form, even if the termination is clearly authorized.

Worked Texas Example

Scenario: Buyer Larry terminates his contract within his valid option period. His agent demands the title company immediately wire the earnest money back to Larry. The seller, angry that the deal fell through, refuses to sign the release of earnest money. Outcome: The title company must keep the funds in escrow. They cannot release the money to Larry without a signed release from the seller, despite Larry being fully in the right. Larry’s agent must send a formal 15-day demand letter under Paragraph 18.