If you are buying a house, there is no doubt that you have heard the term “escrow” at some point. Escrow is a somewhat complicated term surrounding the process of purchasing your new home that most people have a vague understanding of but few have mastered. Since escrow involves the money associated with buying a house, it can be a complicated concept to navigate in the process of home buying.

Escrow helps to ensure the home buying process runs as smoothly as possible by helping prevent potential issues that are often inevitable. With this, understanding escrow is a crucial aspect of the transaction that should be understood by both the buyer and the seller along the way.

Keep reading and about escrow and how it serves a crucial role in the home buying process.


What is Escrow?

Escrow refers to a third-party service that is part of every home purchase. When a buyer and seller initially arrive at a purchase agreement, they select a 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.


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.


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 Is the Closing?

Closing a real estate sale is similar to closing the escrow. It simply means that the deal is completed and both parties have come to an agreement as to the selling price of the home and conditions of the sale.

Most likely, the sales contract contains a closing date, which is when the final papers are signed and is the date the buyer becomes the owner of the home. For the closing to precede, all issues regarding matters such as financing and insurance will need to have already been resolved.

This does not necessarily mean that the buyer can you move into the house on the closing date. The sales contract should state when the seller is to move out and the buyer is to take possession of the property. In most cases, the buyer takes possession at closing, but the parties can also negotiate alternative conditions, such as the seller remaining in the home for a period of time. This is typically the case if the seller is waiting to close on another home purchase or complete the construction of a new home.

Protections for the buyer may also be reflected in an escrow arrangement, such as money being held in escrow to be paid to the buyer if the seller remains in the home longer than agreed.


Why is Escrow Important in the Home Buying Process?

Escrow serves as a neutral state for the depository for the exchange of documents, information, money and closing the deal. Escrow is not mandatory when a house is being sold but it is highly recommended and most lenders will require it. Only the risk of losing money or property is reduced by giving a chance to escrow. The escrow agent is a trustworthy agent by the bank or by an ensured company who cares to assure that the documents, records and information are provided on time and the parties are satisfied with the requirement of the timely transaction. Since the sale or purchase of the home is one of the most important decisions of the one’s life. As in includes the hard earned money or property of both the parties respectively.

Escrow plays an important role in property transactions. The real estate and the escrow not only just involve sale or purchase but also includes the lease refinancing. The personal property also includes the purchase of the business opportunity, of a mobile home, as well as the handling of the sales and stock transfers. Bulk sales usually involve the sale of a business and mostly the notice is being provided to the creditors before the business when the transaction is completed. The escrow can handle the most important and difficult tasks. After the submission, it tells that escrows are not utilized solely on real estate matters and can have benefits for cases which are real and have own personal property transactions. The exchange of cash for the property is not as simple as we think.

Ultimately, the purpose of escrow is to protect buyers and sellers who are involved with the process of buying and selling a home.

Here’s why:

For the Buyer.Sure, you could hand over earnest money check directly to the seller; but, if you did that, there’s a chance that he or she would dangle it above your head to get a deal that works better for them.

For the Seller. Buyers can keep the earnest money until the transaction is complete, but the seller isn’t going to want to sign over the deed to the house until he or she knows the earnest money will be theirs.


Your Role as a Home 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


Your Role as a Home 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