Understanding Real Estate Escrow
What is real estate escrow and how does it work? This is your definitive guide to understanding real estate escrow.
What is Escrow?
Escrow is when a neutral third party facilitates the safe and successful exchange of funds for something of value. In other words escrow is a trusted intermediary, that manages an exchange between two parties. In real estate, escrow protects both the buyer and seller during the purchase and sale of a property.
Escrow Agent
A real estate escrow agent is usually either a title company, attorney, or some other 3rd party who manages the transaction. The escrow agent maintains all documents, funds, and materials related to the real estate transaction.
Escrow Account
In real estate, there are two types of escrow accounts. The first being the pre-closing escrow account and the second lesser known being the mortgage escrow account.
Real Estate Escrow Account: Also called pre-closing escrow account, is the type of escrow account this post is related to. A real estate escrow account is used during the purchase and sale of a property and handles the transfer of funds for the title to a property.
Mortgage Escrow Account: Also called an impound account, is set up by a mortgage company to pay property-related expenses. If a loan includes a mortgage escrow account, your monthly mortgage payment will include installments for property taxes and insurance. These monthly installments are deposited into an escrow account and then used by the mortgage company to pay property taxes and insurance bills.
Escrow Process
1. Signed Contract
After a purchase offer has been accepted you now have a reason to open escrow.
2. Open Escrow
The escrow instructions are drafted and then signed by all parties.
3. Earnest Money
Buyer places earnest money deposit into escrow account. Escrow agent confirms clearance of funds.
4. Title Report
A preliminary title report is prepared showing property ownership, liens, easements, restrictions, and encumbrances.
5. Inspections & Disclosures
The property is inspected during the specified inspection period and disclosures made by the seller are reviewed.
6. Loan Documents
Appraisal ordered by buyer’s lender. Lock in interest rate, points and loan terms.
7. Contingency Removal
Contingencies are contractual conditions of purchase. Common examples are property inspection, appraisal, and financing.
8. Scheduled Closing
Closing is scheduled. Buyer brings balance of cash required to close and mortgage company sends funds to escrow.
9. Closing Docs & Estimated Settlement
Closing docs are drawn, signed, and notarized. Escrow is not complete until all terms have been fully satisfied.
10. Transfer
Once all conditions have been met then funds are released to seller, the title is transferred, and buyer gets the keys.
Advantages of Escrow
For the seller, escrow guarantees that the buyer has the funds needed for the purchase and that the money will be delivered when the title is transferred. For the buyer, escrow guarantees that the seller actually holds claim to the title and that it will be properly signed over. Ultimately, escrow helps ensure trust and security in a transaction.
Let us know what questions you may have about escrow or real estate in general.