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Riya Tayal | 02 Jan 2023

What is an Escrow?

What is an Escrow?

Do you know what really Escrow is? If not, then you are not alone! There are a large number of people out there who haven’t heard the term Escrow before, and therefore we are here to help. The real estate sector is filled with a plethora of unfamiliar terms that can easily confuse a home buyer or home seller. Escrow is one such term that is enough to confuse even the most diligent non-real estate professionals. Escrow is basically the name for a process that plays a crucial role in a real estate transaction. 

So, if you wish to know about Escrow in detail, then have no fear as we will break it down for you. Let’s start with the meaning first!

Meaning of Escrow in real estate

When it comes to real estate, Escrow is a term that homebuyers, home sellers, or real estate agents should be very familiar with and have a detailed understanding of before buying or selling a house. In general, Escrow is a term that refers to a third party, especially hired to handle property-related transactions, the exchange of money, and any related documents. The concept of Escrow in real estate comes into play once both the buyer and seller have reached a mutual offer or agreement. 

In other words, Escrow is when a neutral third party holds on to money during a transaction. This is used as a way to protect both parties during the home buying process. Once the property is purchased, the new homeowner continues to put money into Escrow as a means of making insurance payments and paying the mortgage. 

Talking about the purpose of Escrow, the purpose is two-fold. First, it guarantees the buyer that they will not be scammed by a fraudulent home seller who actually holds no claim to a title. Secondly, it guarantees the home seller that the homebuyer has the funds required to purchase a house and that money will be handed over once the title is transferred. In short, we can say that Escrow helps ensure trust and certainty in high-stake transactions where both the parties are unfamiliar with each other, and both have a lot to lose. 

Now, in the upcoming section of this article, let’s take a closer look at who the Escrow agent is!

Also Read: Purchase Contract Major Elements

Who is the Escrow agent?

As discussed above, an Escrow is arranged by an Escrow agent. An Escrow agent is a neutral entity or person entrusted with holding the financial payments until certain conditions have been met, generally a transfer of title. Because Escrow agents play a big role in completing real estate transactions, they are known as title agents. 

There are a handful of things that the Escrow agent handles. Some of these things involve the transfer of the buyer’s loan documents and property taxes working with the lender for the homebuyer to be sure that the title does not have any liens on it before the transfer of ownership is finished. Your Escrow agent will track and check the transfer of key variables, most importantly, the transfer of the property title to the buyer from the seller and the transfer of funds to the seller from the buyer. In addition, it assures the lender that the loan money is going to the right place. 

It is important to note that you will not be responsible for securing your own Escrow agent. Instead, your lender or broker will facilitate the entire process, and you have to supply the money. If you wish to choose your Escrow agent as a principal member, you have the right to choose your own Escrow agent. 

Also Read: Financial Mistakes In Real Estate Investing

Why do you need a Real Estate Escrow account?

A real estate Escrow account provides spectacular protection for the home buyer, home seller, and lender involved in a real estate transaction. It does this by ensuring that no property or funds will be transferred until and unless the Escrow terms and conditions have been flawlessly met. For instance, a house inspection shows that plumbing repairs are required, which the home seller has agreed to as an Escrow condition but does not complete. So, because the funds are held in the Escrow Account, the homebuyer has complete power to stop the sale process if the repairs are not done. 

To put it simply, Escrow assures all major parties in a real estate transaction that their funds are protected. As a homebuyer, would you feel comfortable transferring funds to a home seller whom you have never met without even knowing for sure that you would receive the title in return? And, as a home seller, would you really take the risk of handing over the title of the property without a guarantee that the buyer is good for the purchase price? Here, Escrow comes into the picture and provides you the protection against such uncertainties and gives all the parties peace of mind. Furthermore, it helps ensure that a real estate transaction goes through as smoothly as possible. 

How does the Escrow process take place?

The homebuyer, home seller, and lender work together to draft the terms and conditions of the Escrow Agreement. This agreement is then signed by all the parties involved in the real estate transaction and is later sent to the Escrow agency. Here, an Escrow agency is a third party separate from your lender. Your Escrow agent will process the documents and funds as per the Escrow instructions.

Now, when it comes to opening an Escrow account, you as a homebuyer should not worry about it as it is not something that you need to be worried about. In general, the real estate agent of the homebuyer or home seller opens the Escrow account, and you might have the right to choose your own Escrow holder depending on the local customs. 

After the offer has been accepted and you have completed the agreement, your real estate agent will place an opening deposit in the Escrow account. Later, the buyer will instruct the Escrow agent to release the funds only when all terms and conditions have been met, the seller’s deed has been signed, and insurance has been issued. Escrow process is not complete until all the terms and conditions have been properly met and all the parties involved have signed the appropriate documents. 

This is all about Escrow in real estate! Whether you are a home buyer or home seller, using an impartial, third party Escrow account is crucial to hold your funds. Escrow safeguards all the parties as they go through one of the most crucial transactions of their lives, i.e., real estate transaction. 


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