People who engage in a real estate transaction encounter the term “escrow” at any point within the home buying process. Escrow is defined by the Merriam-Webster Dictionary as “a deed, a bond, money, or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition.” In the case of a home purchase, any amount placed in escrow will be handed over to the rightful recipient only after a specific set of conditions have been met.
The term is used in several steps during the entire purchase process, as in the following examples:
- Buyers who present an offer of purchase to a seller are required to prepare earnest money, which will be placed in an escrow via an impartial third party entity. Once the buyer and seller have arrived at an agreement, the amount will be handed to the seller.
- Lenders may set up an escrow account (also called a reserve or impound account) to hold funds that will be used to cover expenses for homeowner’s insurance and property taxes.
- The term “closing an escrow” means that all requirements and conditions have been satisfied, the amount in escrow is turned over to the seller, and the property title is transferred to the buyer. In other words, the term refers to the closing of a sale. In other locations, closing an escrow also includes having the deed recorded by the county office.
Escrow accounts are created and maintained by an impartial third-party entity, or someone who will not benefit from the completion or cancellation of the purchase transaction. Examples of personalities who may hold an escrow account for you are a title agent, closing attorney, or escrow agent.
The escrow account holder arranges the money and other required documents between the direct beneficiaries of a real estate transaction – buyer, seller, real estate agent, and mortgage lender. They will also handle and oversee other important steps such as title search, distribution of instructions for each party, arrangement of the closing meeting, release of funds, and recording of the deed.
Special cases of held escrow funds
There are situations where the funds are held in escrow, ranging from issues in the property before closing to special arrangements in ownership transfer.
- If you find something busted or damaged during the final walkthrough of the house, the seller is responsible to have these addressed. However, if the required repairs are not finished upon the date of closing, the funds will be held back in escrow so as to cover the repair expenses.
- One special case involves an extended stay by the seller in the house, with an arrangement that he / she will pay a daily rate for each day spent inside the property. In this case, you may arrange for the escrow agent to hold back some of the seller’s money in escrow to pay for the daily “rent-back” rate until they leave the property in the conditions stipulated in the purchase contract.
- Newly constructed homes may need some minor adjustment here and there, and so holding off a portion of the seller’s funds in escrow should ensure the completion of the work on the property.
Close of Escrow
As mentioned earlier, the closing of an escrow happens when the following have taken place:
- All documents have been signed by both seller and buyer.
- All necessary payments have been remitted.
- The closing agent has distributed the funds and presented the deed at the county office for recording.
- The property title is transferred to you as the new and rightful owner.
All closing documents will be sent to you and the seller by mail. As soon as you receive the papers, review them carefully and inform the closing agent in case of errors. Keep the documents secure, because you will need them for the upcoming income tax return filing.
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