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Explaining Escrow for Buyers

If you remember nothing else

about the word escrow, remember the concept of the impartial third party -someone with nothing to gain or lose from your real estate transaction.

Escrow is not an everyday word for most of us. In fact, it’s a confusing word because in a real estate transaction it has several meanings.

  • Weeks ago when you made an offer on your new home, you wrote an earnest money check that was to be placed in “escrow,” which meant it was to be given to an impartial third party while you and the seller negotiated a purchase contract. A real estate agent probably took care of creating this escrow.
  • Now your lender is talking about creating an “escrow” account, also called a “reserve” or “impound” account, where money for property taxes and homeowner’s insurance will be held. The lender may have an in-house department that handles this type of escrow.
  • Even more confusing is that the “closing of escrow” is being described by someone called an escrow officer.

All of the above are accurate uses of the word. An escrow is something of value such as your earnest money check, or documents such as your purchase and sales agreement, that are given to an impartial third party to hold until specific conditions are met. When everything is finished — everybody paid and the deed recorded with the county, the escrow will close.

If you remember nothing else about the word escrow, remember the concept of the impartial third party — someone with nothing to gain or lose from your real estate transaction. Depending on where you live, that third party — an escrow agent, title agent, or closing attorney — is the person handling your escrow process.

They will juggle all incoming paperwork and money from buyers, sellers, agents, lenders, and assorted others. They will arrange the title search, give each party instructions, schedule the closing meeting, disburse all funds, and see to it that everything that needs to be recorded with the county is completed.

Hold-Back of Funds

There are circumstances when funds will continue to be held in escrow after the ownership transfers to the buyer.

For example, perhaps you’ve agreed to let the seller’s family stay in the house for another week until school is out. You signed a “rent back” agreement, and under its terms the seller is paying you a daily rate to stay in the house. You likely were advised to have the escrow agent hold back a portion of the seller’s proceeds until they’ve moved out and left the house in the condition specified in your contract.

Or perhaps you found something wrong on your final walk through the house. The seller agreed to make the repair, but the work couldn’t be completed by closing day. Money is then held back in escrow to cover the cost.

If you’re purchasing a new home, it is quite common to have funds held back in escrow until unfinished work is complete.

Close of Escrow

When buyer and seller have signed all the paperwork and all the funds have come in, the closing agent disburses the funds and oversees the recording of the documents with the county.

When the deed is filed, title to the property is transferred to you, the new owner. The deal is complete. The escrow is closed.

You and the seller will receive a final closing statement and other documents in the mail. Check the statement carefully and call the closing agent immediately if you spot an error. File the statement with your most important papers. You’ll need it when you file your next income tax return.

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