When buying a home, you’ll eventually find yourself in escrow. But what is escrow? It isn’t as scary as it sounds, but it can be a little complicated for a first time home-buyer. This guide can help you understand the meaning of escrow and how it works.
In short, escrow means a financial arrangement where a third party holds and regulates payments of the funds required for two people involved in a given transaction. It’s a financial tool that allows you to set aside important items—such as the buyer’s earnest money check and purchase agreement document—in an impartial holding area, where it will stay until all of the details are worked out between both groups. (Escrow is commonly seen in, but not limited to, real estate transactions.)
The third party that holds and controls the escrow is called an escrow officer or escrow agent. This individual is the one that holds the documents and items until details are finalized. The escrow officer is usually an attorney, a title company agent, or someone from the closing company.
Escrow reduces the risk of fraud for both parties by dispersing funds only after both people are satisfied. The buyer and seller beginning the transaction, and then the important documents and accounts are given to the escrow officer who acts as a holding tank while details are finalized.
The escrow officer has the job of ensuring that closing goes smoothly and everyone gets paid what they’re owed. At the end of the transaction, the escrow officer will take a commission for their part in the sale. The escrow agent fees vary based on who you use. At the end of the sale, the escrow agent records the deed and title transfer that marks the home as officially sold.
Sometimes a sale is completed, and the ownership is transferred while an account is still in escrow. For example, if the seller must remain in the house for an extra week until their new home is ready, they’ll owe the buyer a “rent-back” agreement. This agreement requires the seller to give the buyer a daily rate for the length of their stay. This money will be held in the escrow account until the seller has completely moved.
Another example of hold-back funds could be when a buyer finds something wrong with the home during the walk-through. The seller may be required to fix these issues, which would require that funds remain in escrow until necessary repairs are finished. The money held in escrow is used to cover the cost and protect the buyer and seller from future disputes.
There are many other situations where an escrow account could have hold-back funds to cover the cost of issues during the sale of a house. The seller will only receive a closing statement and other documents from the escrow account once both parties are completely satisfied and all the funds have been dispersed. Most often, these documents are sent through the mail, but the seller may be able to pick up the documents from a local office.