Understanding Real Estate Escrow

By | January 27, 2014

Escrow is a process that involves valuables being placed into an account controlled by a third party for distribution as per specified instructions. In US, escrow is commonly used in real estate transactions, including the sales of homes. Typically in a real estate transaction, after the buying-selling agreement is signed by the seller and the buyer, shortly an escrow account is created.

The buying-selling agreement contains terms of the transaction, those are to whom funds are to be disbursed and the price. An escrow agent (usually an attorney or officer of a title insurance company) accepts money into the escrow account from buyer and/or buyer’s lender, then disburses funds according to the contract.

The escrow account is used to distributing funds to seller, to ensure all material items associated with transaction, including deed transferal fees, title insurance and loan fees, are paid. When all funds are disbursed and all terms of the agreement are carried out, the escrow is said to close.

  • Need of an escrow: Whether you are the borrower, lender, seller or buyer, you want assurance that no property or funds will change hands until all the instructions in the transaction have been followed. The escrow holder has obligation to safeguard documents or/and funds while they are in possession of escrow holder, and to disburse the funds or/and convey title only when all provisions of escrow have been compiled with.
  • Purpose: The idea of the escrow is to protect the lender by ensuring that you pay your insurance and taxes on time. If you default on property tax, for instance, your municipality can put a lien on house, which will be difficult to sell. Or if the house burns down and you have neglected to pay insurance, the lender would be left with no collateral.
  • How it works:
    • The principals to the escrow borrower, lender, seller and buyer, most usually in writing escrow instructions, to be created, signed and delivered to escrow officer. If there is any broker involved, he will generally provide the information necessary for preparation of escrow documents and instructions to the escrow officer.
    • As per the escrow instructions, the escrow officer will process the escrow. When all the conditions in the escrow are achieved, it will be closed. Although each escrow following similar pattern, in some respects it will be different. As it deals with the transaction and property at hand.
    • The duties of an escrow holder are, in a timely manner to the transaction, following the instructions given by the parties and the principals, handling funds or/and documents in accordance with instruction, paying all the bills as authorized, responding to the authorized requests from principals, closing escrow only when all terms funds are as per instructions.

The selection of escrow holder is generally done by agreement between the principals. The real estate broker may recommend an escrow holder, if he is involved in the transaction. It is the right of principals to use an escrow holder who is competent and experienced in handling type of escrow at hand.

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