Title Tip: Understanding Escrow in a Real Estate Transaction

“We’re in escrow!”

Those wonderful words can be exciting and confusing even for well-informed consumers. Plenty of folks do not fully grasp what escrow means and what purpose it serves.

Once a buyer and seller have signed a mutually acceptable purchase agreement, the buyer deposits earnest money in an escrow account at the title company specified in the contract. The contract is “in escrow” when the title company has the contract and earnest money for the transaction.

The earnest money does not go directly to the seller but is held by the title company until the buyer and seller close the deal. The buyer cannot touch the funds and the seller cannot touch them. The funds are in escrow.

Escrow and earnest money go hand in hand, but they are not the same thing. Essentially, earnest money puts a hold on the property for the buyer. It serves to show serious intent that the buyer is going to honor the contract. At closing, the earnest money is credited to the buyer towards their down payment.

What is escrow?

Escrow is the process of a neutral third party holding something of value during a transaction. Both the money and the property are held in agreement. The impartial third party safely holds the money until closing when all funds are collected, the sale is finalized and the title is transferred. Think of escrow like a trust account held by the title company until both the seller and buyer fulfill their obligations. 

Escrow Agents and Officers

The title company is the escrow agent. My job at the title company is escrow officer. Both the escrow agent and officer serve as an impartial participant entrusted with holding payments until certain conditions are met. Those conditions are usually the transfer of money and a title.

The title company collects the required funds, conducts research, obtains or creates documents for the closing, ensures proper signatures are obtained, transfers the deed, and more. Most of the work is done behind the scenes and before closing. If the deal falls through, they release escrow funds to either the buyer or seller depending on the contract and circumstances.

While the escrow process is a way to protect both the buyer and seller during the real estate process, the buyer has the right to select the escrow agent since they are usually who will be insuring the title of the property they are purchasing.

How Escrow Protects Consumers

Escrowing funds with a neutral third party is important because it protects buyers, sellers and lenders. Escrow provides assurance to all parties that their interests, and their funds, are secure. It is vital to the real estate transaction that the escrow agent authenticates the transfer of title from the seller to the buyer and the transfer of funds from the buyer to the seller.

A buyer would not want to give funds to a seller without assurances that the title is transferred in return. A seller would not want to convey ownership of their property without guaranteed delivery of funds for it. A lender wants verification that their loan money is properly secured and allocated.

Escrow protections ensure everyone gets what they are owed at the same time. It gives all parties peace of mind and provides trust in a major transaction.

Real Estate Escrow vs. an Escrow Account

An escrow account with a mortgage company should not to be confused with the real estate escrow process. An escrow account is sometimes referred to as “reserves.”

An escrow account is set up and managed by a lender to collect tax and insurance payments from a homeowner. The lender will usually collect a monthly sum that is tacked on to the loan payment. When property taxes or insurance is due, the lender pays them for the homeowner out of the escrow account.

Escrow accounts help guarantee the property stays insured and that annual taxes are paid to avoid late charges or defaulting. Some lenders require an escrow account because the lender has a stake in making sure those payments are made.

Closing Escrow 

Sometimes real estate folks refer to the “closing of escrow.” That is when the sale is completed. An escrow officer or attorney will handle the final paperwork, the exchange of funds, and recording of deeds. They verify that all requirements are met before closing the escrow account.

There is nothing scary or tricky about a real estate sale when the proper escrow process is place.

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The opinions expressed are of the individual author for informational purposes only and not for legal advice. Contact an attorney for any particular issue or problem.