Escrow is when a neutral, third party or account holds funds, a deed or other item until a condition is met or an event is completed. It’s most common in real estate transactions, to hold earnest money and deed to a house after an offer is accepted through to closing. The escrow agent then transfers the title of the home from the seller to the buyer and the funds from the buyer to the seller.
Once the purchase agreement is signed, escrow is usually opened by the buyer’s Realtor® with the initial deposit or earnest money and the terms of the agreement, known as escrow instructions. The seller will deposit the deed to the home, mortgage holder’s names and account numbers, tax information and any other forms required either by the escrow instructions or by law. It is the escrow agent’s responsibility to make sure that the instructions are followed to complete the sale of the home.
Escrow can last from several days to several months, depending on the date of closing. During this time, the buyer will secure financing, the house will be appraised and any necessary inspections will be performed. The buyer will also need to fulfill any other requirements set by their lender, such as purchasing home owner’s insurance, a title report, and title insurance. Realtors® for both the buyer and the seller should be monitoring this entire process to ensure that it moves smoothly and help facilitate the solution to any problems. The escrow agent confirms that all of the steps are complete before closing.
Once the conditions of the offer are met, all of the parties involved meet at the closing. The escrow agent will prepare a new settlement statement and prepare all of the paperwork for signing. He or she will also prepare a new deed for the buyer and release the funds to the seller and, if necessary, the holder of the seller’s mortgage. The agent will provide any additional documents needed to complete the sale, including tax statements. Once this is complete; escrow is considered closed.
Escrow companies usually charge a base fee to be split among the buyer and seller as well as fees for each additional task. The fee for the additional task is billed to the party responsible for the request. The total averages 1%-2% of the price of the house.
Some lenders also require an additional escrow account for insurance and property taxes during the life of a mortgage. They want to make sure that both are paid, on time, every year, to protect their investment. If property taxes aren’t paid on a home, the local municipality can put a lien on the home and eventually foreclose. A tax lien has a priority over the mortgage lien. The lender faces a similar risk of losing their investment if the insurance is unpaid and there is a fire in the home. If there is an underpayment, the mortgage company will often spread the additional amount over the next year. If there is an overpayment, the lender will refund your money or apply it to the next payment.