Once you have found the home of your dreams, put in your offer and had the offer accepted by the seller, there is still one more step to complete. That final step is the escrow process, also referred to as closing. Your real estate agent, lender, title agent and closing agent will guide you through the process, but you should also be aware of what is taking place so you know what to expect. It can be overwhelming to understand all the parts of the home buying process, but escrow is really there to protect both the buyer and the seller.

Here is what you need to know to better understand the escrow process and get the best value.

 

What Is Escrow?

Escrow is a process used in real estate transactions where a third party holds onto money or items until the buyer and seller complete their tasks. The buyer and seller select this neutral third party to act as the escrow agent. 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.

Escrow accounts play a crucial role in holding funds before closing on a home and ensuring ongoing obligations like property taxes and insurance payments are paid. After you buy a home, your lender will set up an escrow account too. Each month, part of your mortgage payment goes into this account. This money pays your property tax and homeowners insurance later on in the year.

 

What Is Earnest Money?

Most home buyers are familiar with the down payment and closing costs required for a mortgage. But many are surprised at having to make an earnest money deposit when they put in an offer. You will need cash or easily liquidated funds ready for this purpose when you are house hunting.

Earnest money is an upfront good faith deposit to the seller that demonstrates the buyer’s commitment to the home purchase. Basically, it shows that you are serious about the offer — because if you back out for a reason not covered in your purchase contract, you could lose the earnest money. Pledging earnest money with your purchase offer is not a legal requirement to buy a home, but it is standard practice. It shows the seller that you intend to go through with the purchase as long as there is nothing seriously wrong with the house.

The earnest money requirement prevents a real estate buyer from making offers on many homes since the offer essentially takes the property off the market until they decide which one they liked best. Sellers rarely accept offers without the buyers putting down earnest money to show that they are serious and are making the offer in good faith.

Assuming that all goes well and the buyer’s good-faith offer is accepted by the seller, the earnest money funds go toward the down payment and closing costs. In effect, earnest money is just paying more of the down payment and closing costs upfront. In many circumstances, buyers can get most of the earnest money back if they discover something they don’t like about the home.

 

Why is Escrow Important?

Escrow is important for several reasons. First, it provides a level of protection for both the buyer and the seller in a transaction. The third-party escrow company ensures that the funds or assets are held securely and released only when certain conditions are met. This helps to prevent fraud and protects both parties from any potential scams or illegal activities.

Second, escrow can help to simplify complex transactions. When there are multiple parties involved in a transaction, or when there are numerous conditions that need to be met, using an escrow account can help to ensure that everything is handled smoothly and efficiently.

Finally, escrow can help to reduce the risk of disputes between the parties. By using a neutral third party to hold and distribute funds or assets, both parties can be assured that the transaction is being handled fairly and impartially.

 

How Escrow Protects the Buyer

When buying a home, you want to ensure that your investment is protected. That is where escrow comes in. When buying a home, your purchase agreement will usually include a good faith deposit (also known as earnest money). If the home purchase is successful, the deposit will be applied to the buyer’s down payment.

Here’s how escrow protects buyers in a real estate transaction.

  • Your Deposit is Protected

Escrow protects buyers by holding the deposit money paid at closing. Once that money is deposited into escrow, it is typically non-refundable (unless both parties agree to cancel the transaction). This protects buyers if the seller backs out of the deal or fails to meet other agreed-upon conditions, such as making necessary repairs before closing.

  •  All Conditions of Sale Will be Met

If you are in the process of buying a home, you have probably gone through the escrow process. Escrow is a term used in real estate to describe the holding of money and documents by a third party until all conditions of the sale have been met. If for some reason the escrow doesn’t close on time, there are a few things that could happen. This article will discuss what could happen if escrow doesn’t close on time and how you can protect yourself.

  • All Paperwork Will be Handled by a Professional

Being “in escrow” basically means “drowning in paperwork,” or at least it can feel that way sometimes. From disclosure forms to inspection reports and insurance information, there are a lot of things to keep track of. Your escrow officer and real estate agent will be a tremendous resource here, letting you know what needs to be completed and when. It’s your job to hold up your end of the partnership and get everything completed in a timely manner.

 

How Escrow Protects the Seller

So much is on the line when you enter a real estate transaction. That is why you need a neutral third party to hold and safeguard the deposit money until all the conditions of the sale are met.

  • Peace of Mind

Having a neutral third party to hold onto the important documents and all the money allows you to know that as long as you do your part and the other party does theirs, the end will result in what you had planned for. Without having an escrow account and a neutral third party, you are relying upon the other person to be true to their promises and that is a dangerous assumption to have when it comes to business.

  • Reduced Risk

Some real estate transactions naturally present more risk to the seller. If you need to engage in long-distance selling, you are exposing yourself to certain risks. Even when you sell to a local party, you are still going to be dealing with someone you don’t know, in most cases.

  • Financial Security

One of the main advantages of using an escrow service is that it provides a high level of security for both parties. The funds are held by a neutral third party, which reduces the risk of fraud or other issues that can arise in financial transactions. As the Seller, you are also protected from any unexpected chargebacks, thereby ensuring that you will not fall prey to a scam.

 

 The Escrow Process: A Step-by-Step Breakdown

The escrow process, while it can sound as complex as a tax code, is really just a fancy to-do list for buying a house. It goes something like this:

  1. Open escrow
  2. Deposit your earnest money
  3. Get the inspections done
  4. Finalize your loan
  5. Sign the documents
  6. Close escrow