If you have ever watched any show about real estate, then you’ve probably noticed there seems to always be a flutter of excitement and drama anytime the word “escrow” is mentioned.  The words, “the home is in escrow” is followed by a dramatic melody and pause from the characters on the show.  In real life, escrow in real estate is part of the process of purchasing or selling a home, but, thankfully, it isn’t always quite so dramatic.

What is escrow in real estate?

Escrow in real estate is a legal agreement where a third party agency (separate from the sellers and buyers) opens an account to hold money until all the conditions in the real estate contract for a home have been met.

What goes into the escrow account?

As the buyer of a property, you make an earnest money deposit as part of the offer on the home.  This earnest money is a small portion of the home’s list price that you offer to demonstrate to the sellers the seriousness of your offer.  This money is placed in the escrow account.

The money is held in the account until the property is sold to the buyer.  When this happens, the earnest money becomes part of the down payment for the home.  If the contract is voided, then the earnest money will be dispersed to the buyers or sellers according to the stipulations in the contract.

Who holds the escrow account?

Typically, a third party like a title company will hold the escrow until the home is sold.  Banks and financial firms can also serve as escrow in real estate account holders.  The buyers and sellers will identify in the contract the name of the third party responsible for the escrow account.

Are there other types of escrow accounts?

Yes, there are two escrow accounts that are used in real estate.

Mortgage Escrow Account

If you have a mortgage, then an escrow account exists to hold funds for your property taxes, possible mortgage insurance, and homeowners insurance.  This type of escrow account is managed by your lender.  Typically a little bit of your mortgage payment is placed into this account each month in order to pay for these expenses.

Mortgage companies will recalculate the amount of money needed in this escrow account to cover your expenses, so your monthly mortgage payment can change if these costs go up. Usually, if there is a calculated shortage, the lender will also offer the option of making a one time payment to fill in the shortage.

Unresolved Issues Escrow in Real Estate Transactions

Sometimes the buying and selling process does not go as smoothly as possible.  If an agreed upon repair was not completed or if the condition of the home is not the same as during the home inspection contingency (for example, the heating system that was working during the home inspection is not during the final walk-through), then an escrow account may be opened to hold the seller’s funds until the issues have been resolved.  Once the contractual obligations have been satisfied, the escrow account hold will release the funds to the seller. The account can also be used to pay for the repairs.

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