Everything you need to know about Escrow

What is Escrow? Recently first time home buyers have joked about either not knowing what Escrow is or being thrilled with themselves for finally learning about it. It is your lucky day, if you are unfamiliar with escrow; you are going to learn now. If you don’t remember anything from this article, remember the concept of the impartial third party – someone with nothing to lose or gain from your real estate transaction.

Now let’s dive further into it. Escrow is not a term we hear every day. The term gets confusing because it has several different meanings in the real estate world.

1. Weeks ago when you made an offer on your new home, you wrote a check that has to be placed in “escrow” which meant it was to be given to an impartial third party while you and the seller negotiated a purchase contract. A real estate agent probably took care of creating the escrow.
2. Now your lender is talking about creating an “escrow” account, also called a “reserve” or “impound” account, where money for property taxes and homeowner’s insurance will be held.
3. To throw more words into the mix, there is such thing as the “closing of Escrow”, which is described by someone called an escrow officer.

All three listed above are accurate uses of the word. An escrow is something of value such as your earnest money check, or documents such as your purchase and sales agreement, that are given to an impartial third party to hold until specific conditions are met. When everything is finished – everybody paid and the deed recorded with the county, the escrow will close.

They will also juggle all incoming paperwork and money from buyers, sellers, agents, lenders and anyone else involved. They will arrange the title search, give each party instructions, schedule the closing meeting, disburse all funds and make sure that everything that needs to be recorded with the county is completed.

Hold-back of Funds

There are circumstances when funds will continue to be held in escrow after the ownership transfers to the buyer.

An example would be, say you let the seller’s family stay in the house for another week until school is out. If you signed an agreement with the family and they are paying you according to how long they stay. If a situation similar to this arises, you will likely be advised to have the escrow agent hold back a portion of the seller’s proceeds until they have moved out and left the house in the condition agreed upon.

This happens too, maybe you are doing your final walk through of the home and you realized something is not fixed that you agreed with the seller to be fixed. Money is then held back in escrow to cover the cost. If you are purchasing a new home, it is common to have funds held back in escrow to cover the cost.

Close of Escrow

When the buyer and seller have signed all the paperwork and all the funds have come in, the closing agent disburses the funds and oversees the recording of the documents with the county. When the deed is filed, title to the property is transferred to you, the new owner. The deal is complete. The escrow is closed.

Finally, you and the seller will receive a closing statement and other documents in the mail. Check the statement carefully and call the closing agent immediately if you spot an error. File the statement to your most important papers. You will need it come tax season!