You may have heard the term Escrow from your real estate agent and be wondering what it means.  It is important to know what is happening in your transaction as you buy your home and escrow is a term you will want to know about.

This is Michael Anthony O’Connor with Community Home Funding and in this video, I am going to talk about escrow, what it is and how it works!

What is Escrow?

Escrow is a financial arrangement in your real estate transaction.  Escrow is set up for a third party to hold and manage the payment of the funds required for two parties involved in the real estate transaction. Having a third party provides a more secure transaction by keeping the payment in a secure escrow account which is only released when all the terms of an agreement are met.  Your escrow account is overseen by the escrow company.

While the payment is ‘In Escrow’ the transaction can be safely carried out without risk of losing money due to fraud. Escrow allows for secure transactions and confident buyers and sellers.

How does Escrow Work?

Escrow reduces the risk of fraud by acting as a trusted third-party that collects, holds and only disburses funds when both buyers and sellers are satisfied.

Here is when you will be involved in your escrow account.

1. Escrow and Your Offer

When you make an offer on a home, you will write an earnest money check that will be placed into an escrow account.  This is one of your first financial transactions in buying a home.

What this means is that the money is not going to the seller or the lender.  Instead your money is held by an impartial third party until you and the seller negotiate a contract and close the deal. You cannot touch it and the seller cannot touch it either.  Your money is held “in escrow”.

This is important and will give you peace of mind because having your money held in escrow protects both parties.

Escrow is important because let’s say for example that you put down earnest money that went directly to the seller and they had the money and then for whatever reason you and the seller don’t reach a final purchase and sale agreement. You certainly would not want the seller holding your earnest money as a negotiating tactic and be at risk of losing it all together.  On the other hand, the seller certainly would not want to sign over the deed to the home until you have paid for it for the terms you agree on.  You of course would not want to hand over cash for the home without knowing that the deed has been signed over to you.

Having an escrow account ensures everyone gets what they agreed upon at essentially the same time.

The next time you will hear about your escrow account is when you are working with your mortgage lender.

2. Escrow and Your Mortgage Lender

As you near the end of getting your home loan, your mortgage lender may talk about an “escrow” or “impound” account or “reserves.” These terms mean pretty much the same thing, so do not be confused.  What they are asking you is if you would like to have funds held by the lender to make payments for your homeowners’ insurance and property taxes. Mortgage lenders often will offer you the option to collect them monthly along with your loan payment and then pay the tax and insurance bills when they are due.  Some lenders may require you to have these payments placed into an impound account depending on your loan program.  If you set up an escrow or impound account with your lender, they include the amount for your homeowners insurance and property taxes with your monthly housing payment and they will hold that money each month in an escrow account.  When the time comes to pay these bills, the lender will pay them out of your escrow account.  It’s a smart way to make sure that the money you are required to pay every year is saved up to get paid.

The next time you will hear about your escrow account is when you are closing on your home.

3. Escrow and Your Closing

When you are getting ready to sign your closing documents on the home you are buying you will probably hear your lender or realtor talk about the “closing of escrow.”

The closing of escrow is when your purchase is completed.

A closing or “escrow officer” will oversee your closing documents and handle the exchange of funds and recording of the deeds.  They will ensure that all the money is properly disbursed, that the documents are signed and recorded, and that all necessary conditions are met before closing the escrow.

If you have negotiated something in your contract that will not be completed or that may impact your taking possession of your home, you may hear the term “escrow hold-back”.

4. What Is Escrow Hold-Back of Funds?

There are instances where the sale of a home is completed, and ownership of the home is transferred but funds are still held back in your escrow account.  An example may be, if you’ve agreed to let the seller’s family stay in the house for an extra week until their new home is ready.  This means that you would sign a “rent-back” agreement requiring the seller to pay you a daily rate for the length of their stay. In this example your real estate agent would advise you to hold back a portion of the seller’s proceeds until they have moved out and left the house in the condition specified in your contract.

Another instance of an escrow hold back would be if you found something wrong during your final walkthrough of the house. Maybe the seller agreed to make the repair, but the work could not be completed by your closing day.  In this example that money could be held in your escrow account to cover the cost of the repairs.

Once escrow is closed and all funds have been disbursed, you and the seller will receive a final closing statement and other documents in the mail.

You want to be sure to check the statement carefully and call the closing agent immediately if you spot any errors.  Be sure to file your statement in a safe spot with your other home loan documents.  You’ll probably need them when you file your next income tax return.

Knowing the terms and steps in your real estate transaction is important.  Be sure to get your questions answered along the way and make certain that you are working with licensed professionals.

Thanks for watching.