How Escrow Works
For most people, a house is the most expensive purchase they will make in their lifetime. Since the purchase is so large, securing funding for your home may take longer than the actual sale. The company that manages the funds for the house until closing is called the "escrow company," "escrow agent," or simply "escrow."
What Is Escrow?
An escrow company or agent is an independent third party with a fiduciary duty that handles aspects of the purchase and loan transaction. The escrow company will often:
- Hold the down payment until the closing
- Receive the amount of the loan from the lender, usually by wire transfer
- Transfer the down payment and mortgage money to the seller
- Transfer and record the deed of title to the buyer or title company
- Make sure the lender is protected by filing and recording the mortgage with the local county recorder of deeds
Who Handles Escrow?
In some states, the escrow functions are handled by a licensed title insurance company or an escrow company. However, in other states, an attorney handles the transaction. In many states, escrow agents must be properly licensed in order to conduct business. In addition, the escrow agent must be someone who is not otherwise associated with the transaction. For example, the buyer's real estate agent or the seller's attorney cannot hold the escrow account. They may, however, recommend escrow agents that they have used before.
How Does Escrow Fit Into the Home Buying Process?
The home buyer and seller usually pick an escrow agent while negotiating the purchase agreement. They can also draft specific instructions for the escrow agent to follow. The agent will then collect the buyer's earnest money deposit, along with copies of the purchase agreement and any other paperwork.
The buyer will then work with a lender to finalize the mortgage. That can involve:
- A home inspection
- A title report and title insurance
- Acquiring homeowner's insurance
- Comparing the final mortgage offer with the good faith estimate
- Final walkthrough
After these steps are completed, the escrow agent will collect the loan money from the mortgage. The escrow agent is generally responsible for disbursing funds for taxes, insurance premiums, realtor commissions, mortgage satisfaction, and recording costs.
The money is transferred to the seller at closing. The seller receives funds after costs are deducted, taxes, and insurance prorations. The remainder of the down payment and mortgage money will then be given to the seller.
For more information, see FindLaw's Home Buying Guide and the section on the Home Buying Process. For legal advice involving escrow an buying a home, talk to a real estate in your area to help protect your investment.
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