What is Escrow?

• Real Estate Tips
• February 2, 2023

Learn What an Escrow is and How it Works!

“Escrow” is a term you’ll probably often hear when buying a home. But unless you’re familiar with the real estate world, you may wonder, “What is escrow?” The answer is simple: escrow is a legal arrangement where a third party holds property, or money, on behalf of two other parties that are in the process of completing a transaction. In a real estate transaction, the third party(or escrow agent) holds all documents and funds for both buyer and seller. That provider protects your money and covers all parties by ensuring the terms of the mortgage agreement and purchase contract are met. 

There’s a lot to know about escrows, but it’s important to understand the basics. Keep reading to learn how escrows work in real estate. 

How Does Escrow Work?

When you’re buying a house, you must sign what’s known as a “purchase agreement.” Once you sign that agreement, you may have to make an earnest deposit showing you’re serious about purchasing the property. The home seller typically keeps the money if you don’t meet your contract obligations. But, if you successfully bought the house, the deposit will apply to your down payment. 

To protect yourself and the seller, an escrow agent will hold the deposit in an escrow account until it’s time to close the purchase of your home. After you complete the transaction, the money will go toward your down payment. 

But escrow accounts aren’t just for earnest deposits. Escrow agents also use these accounts to give credits back from the seller and hold any funds that are part of the transaction. Escrow agents will distribute the funds as detailed in the mortgage agreement and real estate contract once you close on the property. 

Homebuyers sometimes hold their money in escrow even after they complete the home sale. You may wonder why, but consider this: what if you find something wrong with the house before you close the purchase? Holding the money in an escrow account would incentivize the seller to fix the property quickly to earn their money back. 

Do I Get to Choose an Escrow Provider?

Typically, homebuyers get to choose the escrow agent, but the seller must agree with who you select. If you have the option to find an escrow agent, make sure you check their credentials before you make a final decision. You could even talk to the home seller and find an escrow agent you’re both comfortable with. Make sure you both find a reliable agent who distributes the money correctly and is responsible for their work. No one wants to work with someone who would complicate the sales process.

Talk to a Realtor About an Escrow

If you have questions about escrows and what to do, you can easily talk to a Realtor for clarity! They could steer you in the right direction and tell you what steps to take. 

Contact Realtor Linda Moore today if you’re interested in buying a house.