Earnest Money Explained for New York Home Buyers

A signed contract of sale usually comes with money attached. In the language of the CFPB, that money is earnest money, while in many New York transactions the same funds are more often called the contract deposit or down payment. The label matters less than the answers to three practical questions: who holds the funds, under what conditions they come back, and what happens to them at closing.

What earnest money is

The Consumer Financial Protection Bureau’s glossary gives a plain definition:

“Earnest money is a deposit a buyer pays to show good faith on a signed contract agreement to buy a home.” — CFPB, Mortgages key terms

The glossary adds that a seller or a third party, such as a real estate agent or title company, holds the deposit. If the sale closes, the money can go toward closing costs or the down payment. If the contract ends for a reason it permits, the deposit is returned to the buyer.

Earnest money is not the same as escrow in the lender sense. The same glossary uses “escrow” for an account set up by a mortgage lender to pay property-related expenses such as taxes and homeowner’s insurance. The two ideas share a word and little else, which sometimes causes confusion when paperwork arrives.

How it typically works in New York

In a New York residential purchase, a Nolo guide to New York contracts describes the deposit as typically about 10 percent of the purchase price, paid by certified check, wire transfer or personal check made out to the sellers’ attorney or firm. The attorney keeps the money in an attorney escrow account, typically non-interest bearing, while the sale is pending, and the sellers cannot spend it. At closing, the deposit is credited against the purchase price.

Because that description comes from a general legal-information publisher rather than a statute, the details are best read as common practice. Contracts vary, and the exact amount, payee and timing are matters for the written agreement and the attorneys negotiating it.

The attorney escrow account

Rules for lawyers shape how the funds are handled. A New York State Bar Association practice chapter on escrow accounts explains that once an attorney takes control of a client’s or third party’s funds, a separate attorney escrow account is required. Large sums held for a long period may belong in a separate interest-bearing account, and the escrow agreement should say who receives the interest. The chapter also explains the IOLA option, in which the bank sends interest to IOLA.

Record-keeping and separation receive emphasis. The chapter calls leaving earned fees in an escrow account after collection “illegal comingling,” and it requires a ledger for each client and monthly reconciliation. Checks may be written only against collected funds, meaning funds that have completed the federal collection process, not a provisional balance. For a buyer, the practical meaning is that the deposit should sit apart from the attorney’s own money until the contract tells the attorney where it goes.

A different rule for new construction and offering plans

Buyers of new condominium or cooperative units under a sponsor’s offering plan are covered by separate state rules. The Attorney General’s model purchase agreement language for Part 20 offering plans requires a New York law firm to act as escrow agent, with signatories who cannot be the sponsor, selling agent or managing agent. Deposits belong to the purchaser, and the sponsor may not commingle or pledge them.

The model language sets timelines as well. The escrow agent signs the agreement and places the deposit in the account within 5 business days of tender, and gives written notice with the account details within 10 business days after deposit. If no notice arrives within 15 business days, the purchaser may cancel within 90 days of tender, subject to an exception when the Attorney General is shown that the deposit was timely placed and notice timely mailed. Interest accrues from the date of deposit and is paid or credited to the purchaser at closing. These requirements apply to offering plans, not to an ordinary resale of a single-family house.

Release of offering-plan deposits

The same model language spells out how funds leave the account. A deposit is released at closing of title under the agreement, under a later writing signed by both sides, or under a final, non-appealable court order. If release is requested on any other basis, the escrow agent must give both parties at least 30 days’ written notice, and a written objection within that period keeps the funds in place. The agent may also deposit the funds with the county clerk, with written notice to both parties.

Other protections appear in the text. No fees may be deducted from the account, and the escrow agent owes a fiduciary duty to the purchaser. The document lists federal deposit insurance at $250,000 per deposit, with amounts above that uninsured unless several accounts are opened at different institutions. For a high-priced unit, the size of the deposit relative to that ceiling is a fair question to raise with an attorney.

When the deposit comes back

Whether a deposit is returned turns on the contract. The CFPB advises making the purchase offer and sales contract contingent on obtaining financing and on a satisfactory inspection, so that a buyer is not contractually required to buy if the loan falls through or an inspection finds serious problems; see the agency’s guidance on finding a home. The CFPB’s section on builders adds that a builder deposit can be returned only under certain conditions, so buyers should ask about those conditions in advance.

Under the Nolo description, a buyer who cancels under a mortgage contingency has not defaulted, and the deposit should not be at risk. Cancelling for a reason the contract does not allow is another matter, since the sellers may keep the deposit as liquidated damages. The same source says that if the sellers demand the deposit and the buyer objects within ten days, the attorney cannot release it, and the dispute commonly ends up in court.

New York’s seller disclosure form is one tool for avoiding surprises before signing. The Department of State’s Property Condition Disclosure Statement must be delivered to the buyer or the buyer’s agent before the buyer signs a binding contract of sale. It is a statement of conditions known to the seller, not a warranty, and it covers one-to-four family homes.

Contract terms that affect the deposit

Three phrases are worth recognizing in a contract of sale. A contingency is a condition, such as obtaining financing or a satisfactory inspection, that lets a buyer withdraw without penalty if it is not met. Liquidated damages are an agreed amount, often the deposit, that a seller may keep if a buyer defaults. And “time of the essence” makes the closing date a firm deadline.

None of these operates the same way in every contract. The Martocci decision discussed below shows that even a time-of-the-essence date did not remove the sellers’ entitlement to a reasonable adjournment to address a buyer’s objection. Because the written language controls, buyers typically have an attorney review it before signing, and the Nolo guide likewise says a New York real estate attorney should review any specific contract.

Protecting the funds from fraud

Wire instructions are a known target. The CFPB’s Owning a Home hub warns that scammers target homebuyers in the days just before closing, often through phishing emails that impersonate mortgage contacts, and it links to a guide on protective steps. Although that warning concerns closing, deposits sent by wire at signing involve the same risk of a spoofed message. Confirming wire instructions by phone with the attorney’s office, using a number obtained independently of the email, is a precaution worth discussing with counsel before money moves.

A Nassau County example

Court decisions show what is at stake when a buyer does not close. In Martocci v Schneider, decided by the Appellate Division, Second Department in 2014, a buyer contracted to purchase a house in Port Washington, and the sellers’ attorney held a $98,500 down payment, 10 percent of the price, in escrow. The buyer had worried that the certificate of occupancy did not cover later improvements but had not told the sellers, and on the time-of-the-essence closing date she did not appear and demanded her deposit back.

The court granted the sellers summary judgment dismissing the complaint and on their counterclaims to keep the down payment. It reasoned that the buyer had identified no code violation, that where sellers had no prior notice of a defect a buyer generally must appear and tender performance, and that the sellers had shown they were ready, willing and able to close. The case turned on its own facts and is not a prediction about any other contract.

Questions to settle before the deposit is paid

• How much is due at signing, and by what method of payment?
• Who holds the funds, and in what type of account?
• Which contingencies protect the deposit, and what deadlines apply to each?
• What counts as a default, and does the contract treat the deposit as liquidated damages?
• If a dispute arises, what does the contract say about release of the funds?

Related reading

• Contingent, pending and active: MLS statuses explained
• Preparing for a home inspection in New York
• How to read a closing disclosure in New York

This article offers general information only and is not legal or financial advice.

Rules, rates, fees and procedures change; confirm current details with the official sources linked above and with a licensed attorney or other qualified professional before making decisions.

Sources

• CFPB: Mortgages key terms
• CFPB: Find the right home
• CFPB: Owning a Home
• Nolo: New York home buyers, being in contract and what happens to the deposit
• NYS Attorney General: Model purchase agreement language (Part 20 offering plans)
• New York State Bar Association: How to open and manage escrow accounts
• NY Courts: Martocci v Schneider, 2014 NY Slip Op 05308
• NYS Department of State: Property Condition Disclosure Statement (DOS-1614-f)