What is escrow and how does it work?

If you have researched the home buying process you would have realised that there are several steps to homeownership. There are also a number of contingencies and contractual obligations that must be fulfilled before the keys are handed to the buyer. Needles to say, the home buying process can be complex and confusing. However, escrow can make the home buying process much smoother. So, what is escrow and how does it work?

What is escrow?

Escrow can be defined as the withholding of money by a third-party until a transaction can be completed and concluded. As such, as escrow will act as an intermediary, holding on to the money until the terms of the sale have been agreed and satisfactorily met. This means using an escrow will make your property purchase safer. Some of the situations were escrow can be used include

1. Online purchases

An escrow account can be used to safeguard a substantial online payment until the buyer receives the item. As such, the buyer will deposit money into an escrow account and the funds will only be released once the buyer and seller are satisfied.

2. Ongoing payments

Secondly, an escrow account can also be used for large payments such as property taxes and insurance. Under this arrangement, the property owner will make monthly payments into an escrow account and the funds will be used to settle payments when they are due.

3. Home buying

Lastly, an escrow account can be used in the home buying process. A buyer will deposit earnest money into an escrow account. This money will be held in the escrow account until the sale is finalised or cancelled.

How escrow works in real estate

Once your offer has been accepted the house will now be in escrow. The procedure to close on a home can be long and the seller would like to know that the buyer is serious about buying. As such, a buyer deposits earnest money into an escrow account as a show of good faith when making an offer. The purchase contract will clearly stipulate how much as well as where the earnest money will be held. The home closing process will continue as each of the contingencies are met. Some of the conditions that may need to be met include an appraisal, title search and home inspection. When all the conditions for the purchase are met the earnest money will then be applied to the sales price. At this point, the sale will close and finish.

Escrow accounts

There are two main types of escrow accounts in real estate. The first type of escrow account is primarily used to hold the earnest money during the sale of a home. The second type of escrow account may be used once your home closes. The latter type of escrow account is set up by your lender and is used for the purposes of paying expenses related to your property. A part of your monthly mortgage payments is diverted into an escrow account. As such, this escrow account is then used to pay your insurance and property tax bills. Keep in mind that most mortgage lenders will insist on you paying your property tax and insurance bills using an escrow account.

The benefits of escrow

To start with, an escrow is vital during the home buying process as it shows the seller that you are a serious and motivated buyer. Besides this, an escrow account also helps hold both the seller and buyer liable to the terms of the contract. Moreover, an escrow account simplifies the insurance and property tax payment process.

Choosing an escrow account

When it comes to a non-biased escrow entity you have the option to use a title insurance company, an attorney or a designated escrow company. Generally, the choice of escrow company is made by the buyer, although the seller must be in agreement. Some of the considerations when picking an escrow company include the experience of the escrow company. Besides this, you also have to assess the stability of the escrow company. Lastly, you will have to take into consideration the price of the escrow services.

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