CTC CTC Financial Transactions and Escrow 1 — Questions and Answers
Question 1: What is 'earnest money' in a real estate transaction?
- A deposit made by the buyer to demonstrate serious intent to purchase (Correct answer)
- The commission paid to the listing agent at closing
- A fee charged by the title company for escrow services
- The full down payment submitted on the day of closing
Correct answer: A deposit made by the buyer to demonstrate serious intent to purchase
Earnest money is a good-faith deposit from the buyer showing serious intent to purchase, which is typically credited toward the purchase price at closing.
Question 2: Who typically holds the earnest money deposit during a real estate transaction?
- An escrow company, title company, or broker's trust account (Correct answer)
- The buyer's personal savings account
- The listing agent's personal bank account
- The seller directly upon acceptance of the offer
Correct answer: An escrow company, title company, or broker's trust account
Earnest money is held in a neutral third-party account — such as escrow, title company, or a broker's trust account — until the transaction closes or is cancelled.
Question 3: What is the primary role of an escrow officer in a real estate transaction?
- To act as a neutral third party that manages funds and documents until all conditions are met (Correct answer)
- To represent the buyer's interests in price negotiations
- To conduct the physical home inspection
- To approve or deny the buyer's mortgage application
Correct answer: To act as a neutral third party that manages funds and documents until all conditions are met
An escrow officer serves as a neutral intermediary who holds funds and documents, ensuring all contractual conditions are fulfilled before the transaction closes.
Question 4: When must a transaction coordinator verify that the earnest money deposit has been received?
- Within the timeframe specified in the purchase agreement (Correct answer)
- Only at the time of the final closing
- After the home inspection report is delivered
- When the seller verbally accepts the initial offer
Correct answer: Within the timeframe specified in the purchase agreement
The TC must confirm earnest money deposit within the timeline defined in the purchase contract, as failure to deposit on time can constitute a breach of contract.
Question 5: What happens to earnest money if the buyer backs out of a transaction without a valid contingency?
- The seller may be entitled to keep the earnest money as liquidated damages (Correct answer)
- The earnest money is always returned to the buyer unconditionally
- The earnest money is split equally between buyer and seller by default
- The title company retains the earnest money as an administrative fee
Correct answer: The seller may be entitled to keep the earnest money as liquidated damages
If a buyer defaults without exercising a valid contractual contingency, the seller may be entitled to retain the earnest money as liquidated damages for lost time and opportunity.
Question 6: What is the key difference between an escrow account and a broker's trust account?
- Escrow accounts are transaction-specific while trust accounts hold various client funds for a brokerage (Correct answer)
- Trust accounts are used exclusively for mortgage payment processing
- Escrow accounts earn higher regulated interest than trust accounts
- There is no meaningful legal difference between the two account types
Correct answer: Escrow accounts are transaction-specific while trust accounts hold various client funds for a brokerage
An escrow account is opened for a specific transaction, while a broker's trust account is a broader account maintained by the brokerage to hold funds for multiple clients.
CTC CTC Financial Transactions and Escrow 1
What is 'earnest money' in a real estate transaction?