All About Escrow
If you’ve ever sold or purchased a home or have started to think about the process, it’s likely that you’ve come across the term “escrow.” But what is escrow and why do you need it?
What is escrow?
Escrow refers to the deposit of funds, deed, bond, or other instrument into an account of a third party until all instructions are followed and conditions are met. If you’ve ever made a friendly bet with your friend, you may have asked someone to hold the winning prize until there was a clear winner. In real estate terms, the impartial third party holding the “prize” is the escrow agent. To the buyer, the prize is the title to the property; to the seller, the prize is the money; and to the lender, the prize is the lien that secures the loan. None of the parties are allowed to touch the documents or funds until all conditions are met and all instructions are carried out successfully.
Why do we need it?
Escrow is necessary in order to ensure that no one person takes something without giving anything back. The lender needs escrow to make sure all money is deposited before releasing the title. The seller wants to make sure she gets paid before she hands over the keys. The buyer wants the title to the property as soon as he puts down the money.
How does it work?
Once an offer to purchase has been accepted by the seller, escrow is usually opened. It starts with the buyer putting down an “earnest money” deposit that shows the seller that she is serious about the property. (Whether or not this money is refundable depends on the contract.) At this time, both the buyer and seller must sign the escrow instructions. These instructions include deadlines for deposit of funds and inspections, closing date and a description of actions that need to be carried out before the closing.
Upon receipt of all the instruments and documents, the escrow agent makes sure that all instructions are carried out accordingly. The escrow agent also records the sale and pays off any existing liens or mortgages, taxes and other property expenses. If everything is in order, the escrow agent assigns the title to you and distributes the funds and documents accordingly.
Who handles the escrow?
Every state has an escrow process but who carries out the escrow process depends on which state you live in. To carry out the escrow, you will either work with an independent escrow agent/company, a title company, a real estate attorney or a title attorney.
Who selects the escrow agent and who pays the fees?
Unfortunately there is no clear answer because both depend on where you live and what buyer and seller mutually agree upon. In majority of states, it is customary for the buyer to select the escrow agent. It is also common for the lender to state a preference for which escrow agent to use. If the lender works closely with a specific title company/escrow agent, this is always a safe bet because they are likely to communicate effectively, minimizing unnecessary delays. There is rarely a clear-cut rule for who pays the escrow fee, but more often than not, the fees are split between the buyer and seller.