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What the hell is Escrow? (And why is everybody always in it?!)

Escrow serves as a critical safety measure during and after the home buying process. It involves a third party, the escrow agent, who holds funds or important documents until specific conditions are met. From earnest money deposits to managing property taxes and homeowner’s insurance, understanding the role of escrow can demystify the complexities of buying…

Escrow is one of those words you hear thrown around a lot during the home buying process, from “we need to put earnest money into escrow” to “our offer got accepted! We are in escrow!” Sometimes, it seems like the only update is that things are “still in escrow”. But what exactly does that mean? This post aims to demystify what exactly escrow is, and what being “in escrow” means.

What is Escrow?

At its core, escrow is a legal concept in which a financial instrument or asset is held by a third party on behalf of two other parties engaged in a transaction. In the context of home buying, it involves placing funds or important documents (like the deed to a home) into an escrow account managed by an impartial third party, known as an escrow agent, until certain conditions are met.

A silver key next to a miniature house. Caption: Escrow is your trusty third-party that holds assets in behalf all parties until obligations have been met.
Escrow is your trusty third-party that holds assets in behalf all parties until obligations have been met. Photo credit.
Role of Escrow in Home Buying

When you make an offer on a home and it’s accepted, you’ll typically deposit earnest money into an escrow account (with the help of your real estate agent). This deposit demonstrates your serious intent to purchase the property. It remains in escrow, ensuring neither party can use or access the funds, until the deal is closed or falls through.

Similarly, during the closing process, funds for the purchase are placed in escrow, as is the property’s deed. Once all the terms of the purchase agreement have been met, such as passing inspections and securing mortgage financing (with the help of your lender), the escrow agent releases the funds to the seller and the deed to the buyer.

What Does It Mean When Things Are “In Escrow”?

When people say they are “in escrow” after a house offer has been accepted, it means they’ve entered into the final phase of the home buying process. During this stage, a neutral third party, called an escrow agent, holds onto important documents and funds while the buyer and seller work to meet the conditions of the sale.

The process begins when the buyer and seller sign a purchase agreement. This document outlines the price of the home, the terms of the purchase, the amount of earnest money (a deposit made by the buyer to show they’re serious about buying the home), and any conditions that must be met before the sale can be finalized.

These conditions might include things like:

  1. Home Inspection: A professional will check the property for any issues, such as structural problems or pests. If problems are found, the buyer and seller will need to negotiate how they will be addressed.
  2. Appraisal: This is an evaluation done by the lender to ensure that the home is worth the price being paid for it. If the appraisal comes in lower than the selling price, the buyer and seller may need to renegotiate the price or the buyer may need to come up with more money for the down payment.
  3. Financing: The buyer needs to secure their mortgage financing. This involves a lot of paperwork and verification of the buyer’s financial situation.
  4. Title Search: This ensures that the seller has the legal right to sell the property and that there are no outstanding liens or claims on it.
How Long Does Escrow Take?

The steps mentioned above can take time to complete, which is why the escrow process often takes 30 to 60 days. If any issues arise, such as problems found during the home inspection or issues with the buyer’s financing, the process can take even longer.

Escrow After Home Buying

Escrow continues to play a vital role even after you’ve bought your home. As a homeowner with a mortgage, you’ll likely continue to make payments into an escrow account as part of your monthly mortgage payment. This is often done to ensure that large, infrequent costs related to the home, like property taxes and homeowner’s insurance, are paid in a timely manner.

The lender will estimate your annual expenses for these costs and divide the total by 12. This monthly amount is added to your principal and interest payment. The funds are held in escrow until the bills for property taxes and insurance are due, at which point the lender pays these bills from the escrow account.

Why Escrow is Important

Escrow serves as a safeguard for both buyer and seller during the home buying process. It ensures that no funds or property changes hands until all conditions of the agreement have been met. After purchase, it simplifies the homeowner’s budgeting for expenses related to the property by spreading the large costs of taxes and insurance throughout the year.

Understanding the role of escrow in home buying and beyond can help demystify the home buying process. However, it’s always important to ask questions and fully understand each step, particularly when it comes to financial matters. Always consult with your real estate agent and lender to ensure you’re making informed decisions throughout your home buying journey.

Need a real estate agent or lender/escrow referrals? Contact me here.

3 responses to “What the hell is Escrow? (And why is everybody always in it?!)”

  1. […] property matchmaker. They are educators who explain intricate concepts like earnest money deposits, escrow, and the repercussions of default. They will also guide you through the legalities of the purchase […]

  2. […] These insurance costs can be held in an escrow account, along with your property taxes. An escrow account is a third-party account that holds these funds and pays them out when they’re due so you don’t have to.Want to know more about escrow? Read my post. […]

  3. […] additional costs. As pictured below, they can also provide sample mortgage payments, as well as escrow […]

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