If you have just entered the real estate market to either buy or sell a house, you have entered a world of unfamiliar terminology that can be both confusing and overwhelming. For many, escrow is one of the most complicated concepts to understand. While most people have a general idea about what escrow means, few completely understand why this critically important process can make or break their home buying experience.

So what is escrow? In real estate, an escrow account is a secure holding area where important items (e.g., the earnest money check and contracts) are kept safe by an escrow company until the deal is closed and the house officially changes hands. Escrow is also a contractual arrangement in which a third party—usually the escrow officer—maintains money and documents until the deal is done and escrow is closed.

Let’s learn more about the concept and the procedure.


What Is Escrow?

Escrow refers to a third-party service that is part of every home purchase and helps to protect all parties in a real estate transaction. When a buyer and seller initially arrive at a purchase agreement, they select a neutral third party to hold the funds until the purchaser received appropriate assurance that the property had been transferred. The escrow agent collects a deposit from the buyer that is equal to a small percentage of the sale price. This deposit is known as “earnest money”. In exchange, the seller takes the property listing off the market. Until the final exchange is completed, both the seller’s property and the buyer’s deposit are said to be in escrow.


What Is Earnest Money?

Escrow and earnest money are two terms that go hand in hand, but they’re not the same thing. Earnest money is an amount paid in to escrow early on in the home purchase process to essentially put a “hold” on the property for the buyer. It is a way of showing serious intent that the buyer is going to stay true to their offer, and protects sellers from having to deal with buyers putting out multiple offers or going into negotiations on multiple properties. At closing, the earnest money payment is generally taken out of escrow and put toward the buyer’s down payment.


How Does an Escrow Account Work?

Escrow accounts are a part of the mortgage process homebuyers typically cannot avoid. With mortgages, home buyers typically pay a little extra into an escrow account every month, along with their home loan payments.

While a mortgage holder (most typically a bank) collects the principal and interest payments each month, they also can collect homeowner’s insurance payments and property taxes. They will then pay those bills when they come due. They do this because when you borrow money from a lender to finance your home purchase, the property becomes the collateral for your loan. Your lender needs to know that the property is adequately insured so that it can be repaired or replaced if damaged. Likewise, they want to prevent a tax lien being placed on the property if you neglect to pay taxes.


What Does “In Escrow” Mean?

When you hear the phrase “in escrow”, it means that all items placed in the escrow account (earnest money, property deed, loan funds) are held with an escrow agent until all conditions of the escrow arrangement have been met. The conditions usually involve receiving an appraisal, title search and approved financing.

While the earnest money is in escrow, neither you nor the seller can touch it. Once conditions are met, the earnest money will likely be applied toward the purchase price or your down payment on the home.


What Does It Mean to Close Escrow?

To close escrow means that all of the escrow conditions have been met. You have received a home loan, and the title has legally passed from the seller to you. During the closing of escrow process, a closing or escrow agent (who may be an attorney, depending on the state in which the property is located) will disburse transaction funds to the appropriate parties, ensure all documents are signed and prepare a new deed naming you the homeowner.

Afterward, the escrow officer will send the deed to the county recorder for recording before escrow is officially closed. Once closed, you and the seller will receive a final closing statement and other documents in the mail. Check the statement carefully and call the closing agent immediately if you spot an error. Save the statement with your most important papers, as you will need it when you file your next income tax return.


The Escrow Officer

An escrow officer (also known as an escrow manager or an escrow agent) is a professional who acts as a third party during real estate closings and transactions. They do not work for the buyer or the seller of the property and must remain impartial to ensure that transactions are handled fairly and legally. If the closing is successful, the escrow officer will also approve and handle the disbursement of all involved funds.

Escrow officers essentially close real estate transactions, but they also handle funds that have been deposited, monitor the status of earnings on those escrow funds to make sure they are returned to the party who deposited the monies and review contracts and titles to ensure proper filings with local assessors and county records officers. An escrow officer is the person who performs the final steps in property acquisition.

Escrow officers typically work for title companies, mortgage lenders or credit unions. During a home’s closing process the escrow officer is responsible for processing any necessary paperwork, witnessing the document signings and explaining the companies’ services to prospective home buyers. The primary function of the escrow officer, however, is to establish escrow accounts for home buyers and to maintain the funds and records of such accounts. Because of the nature of escrow proceedings, many officers have knowledge of both finance and real estate.


Escrow Protections

Understanding real estate escrow becomes a lot easier once you understand its benefits. Escrow provides assurance for all major parties in a real estate transaction—the buyer, the seller, and the lender—that their interests, and their funds, are protected. Your escrow agent will track and verify the transfer of key variables; most notably, the transfer of the property title from the seller to the buyer and the transfer of funds from the buyer to the seller. It also helps assure the lender that the loan money is going to the right place.

As a buyer, would you feel comfortable transferring thousands of dollars to a seller you have never met without knowing for sure that you would receive the title in return? And as a seller, would you really want to take the risk of handing over a title without a complete guarantee that the buyer is good for the purchase price? Escrow protections help give all parties peace of mind, and help ensure that a real estate transaction goes through as easily as possible.


What is an Escrow Payment?

Each month, you will make one combined payment that will go toward your principal mortgage payment and your escrow.

Although the taxes and insurance that come from your escrow account are often annual payments, you will pay them into your account in equal monthly payments. When your taxes and insurance are due throughout the year, the funds are withdrawn and paid on your behalf.


The Role of the Seller

Some examples of the seller’s legal responsibilities during escrow might include:

  • Obtaining a title insurance policy
  • Paying escrow service fees
  • Paying for drawing the deed and for drawing/recording the reconveyance deed(s)
  • Paying notary fees
  • Paying county (or possible city) transfer taxes
  • Paying any other charges that may have been agreed upon in the contract


The Role of the Buyer

Some of the buyer’s legal responsibilities during escrow may include:

  • Obtaining a standard or owner’s policy of title insurance (varies from area to area)
  • Paying escrow fees
  • Paying fees for drawing a first or second deed
  • Paying notary fees
  • Paying fees for recording the deed
  • Paying any other charges that may have been agreed upon in the contract


What Happens at Citrus Heritage Escrow?

During the escrow period, our title department begins researching and examining all historical records pertaining to the subject property. Barring any unusual circumstances, a commitment for title insurance is issued, indicating a clear title or listing any items which must be cleared prior to closing. The commitment is sent to you for review.

Your escrow officer follows instructions on your contract, coordinates deadlines, and gathers all necessary paperwork. For example, written requests for payoff information (called “demands”) are sent to the Seller’s mortgage company and any other lien holders.

When choosing an escrow company there can be many important factors to evaluate. Fees, location, staff and even recommendations from friends and colleagues are all things to consider. With Citrus Heritage Escrow by your side, you can rest assured that when you receive your settlement check, you’ve gained the maximum benefit from your home sale or purchase.

Call us today with any questions or concerns. Our professional Escrow Agents will help you through this exciting yet confusing process. (951) 335-7200