Tennessee Realtor State Practice Exam

What should be done when earnest money is deposited with a title company?

1. It should be kept in a separate account.

2. It should be used to pay for closing costs immediately.

3. It should remain unreported until closing.

4. It should be returned if the transaction is not completed.

The correct answer is: It should be kept in a separate account.

When earnest money is deposited with a title company, it should be kept in a separate account. This practice is crucial for maintaining the funds' integrity and ensuring they are not commingled with other funds. By keeping the earnest money in a designated, segregated account, it protects the buyer's deposit until the transaction is completed or terminated. This separation also provides a clear audit trail, which can be essential in case of disputes. When the earnest money is in a separate account, it ensures that the funds are readily available for application towards the purchase price at closing if the transaction proceeds, or can be returned to the buyer if the deal does not move forward as per the agreed terms. This approach aligns with the principles of trust account management, which emphasizes the safeguarding of client funds in real estate transactions. Using the earnest money to pay for closing costs immediately would not be appropriate, as the purpose of that money is specifically to demonstrate the buyer's commitment to the purchase and not to allocate it toward other costs prematurely. Keeping it unreported until closing fails to maintain transparency and could lead to compliance issues. Lastly, while returning the earnest money if the transaction is not completed may be correct depending on the circumstances, it does not address the proper handling of the