Buying a home comes with a whole new set of jargon. One word that is commonly tossed around is “Escrow”. What is escrow anyway? Let us explain this super important financial tool and how it can keep buyers and sellers safe.

What is escrow?

In real estate, it has several meanings, but essentially it means your money is being held. An escrow is a financial arrangement where a third party holds and regulates payment of the funds required for two parties involved in a given transaction. It helps make transactions more secure by keeping the payment in an impartial holding area, where it will stay until all of the details are worked out between a buyer and a seller.

Escrow and offers

In order to show a seller a buyer is serious, after making an offer, the buyer will write an earnest money check that will be held in escrow. This money does not go directly to the seller until the buyer and the seller negotiate all aspects of the transaction and the deal is closed. Nobody can touch this money.

Why escrow?

An escrow protects both parties. Having money held by an impartial third party ensures that everyone in the deal gets what they are owed in a timely frame as the deal becomes final. It prevents an uneasiness about signing over a deed without a cash transaction.

Escrow and closing

When your purchase is complete, a closing or escrow officer will handle the final paperwork and manage the exchange of finds and the transfer of the deed. Most commonly an attorney, an escrow officer will ensure that all conditions of the deal have been met before closing an escrow account.

Hold-back of funds

Money can be reserved in escrow for many reasons. If a buyer has agreed to let the seller remain in the home for a brief period after closing, the buyer would require the seller to reserve money in escrow to pay a daily rate for the length of their stay. If a buyer anticipates issues upon inspection or final walk through that they request the seller to pay, money may be held in escrow to cover the costs.

The closing of the escrow account is usually one of the final steps in the home purchasing process. Once all funds have been properly dispersed, the buyer and seller will receive the final closing statement and other documents. All documents should be carefully inspected and any errors should be reported immediately to the closing agent. Be sure to keep all escrow statements, you will need them when you go to file your next income tax return.

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