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All About Escrow: What does it mean in real estate?

An escrow company, as related to real estate transactions, is an impartial third party hired to coordinate the transaction and exchange of money. To protect both the buyer and seller throughout a real estate transaction, an escrow agent participates as a neutral party.

Opening an Escrow Account The first step after a buyer and seller sign a purchase agreement is for the earnest money funds (the money a buyer provides as partial payment and confirmation of intent to close the deal) to be deposited with the escrow company. This is commonly referred to as being “in escrow”. The money is not going directly to the seller but is being held in an escrow account. The escrow agent prepares the escrow instructions derived from the terms of the purchase agreement and also places the funds in the escrow account. The escrow agent will use these instructions as a guide to closing and will rely on them to determine what to do in the event of a dispute. The escrow account set up by your escrow agent will be closed once the final closing documents are signed and funds are transferred to the seller.

Closing Escrow The escrow officer will oversee the final closing documents and exchange of funds according to the escrow instructions. Once all the documents have been prepared for closing, the buyer and seller will receive a settlement statement. Be sure to review this statement and confirm that no changes are necessary prior to signing the closing documents.

Once escrow is closed and all funds have been dispersed, the buyer and seller will receive a final closing statement. Review the statement and be sure to contact your escrow agent should you find any errors. Be sure to keep this statement in a secure place because you may need it for your next tax return.

Mortgage Escrow Accounts If financing your home purchase, your lender might require a separate escrow account for the lender to complete certain payments on your behalf. Your lender has a vested interest in making sure all payments, such as homeowner’s insurance and property taxes, are being made on the property. The lender will create the escrow account and include a statement of the account activity and balance with your monthly mortgage statement.

Summary When selling or buying a home For Sale by Owner, an escrow company will ensure your transaction is carried out according to the terms of your contract. Real estate agents also entrust escrow agents with carrying out closing instructions. Escrow agents play a vital role for a smooth and successful closing. The escrow account is simply the account created by your escrow agent to hold funds until the closing documents are signed and the transaction is completed. The escrow account will typically be closed once all funds have been distributed.

If you are financing your home, your lender may open a mortgage escrow account. Mortgage escrow accounts are used by lenders to hold pre-paid funds pertaining to your property in able to ensure that timely payments are made.


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