How Escrow Works

Buying a new home is a learning process, even for those who have done it before. You may hear terms not otherwise heard in your everyday life. One of them is “escrow.” But in case you aren’t exactly sure what escrow means or how it will affect your homebuying process, the details are below. Note: this article is specific to the state of California, because real estate laws and party roles can vary in every state.

Definition

Escrow is a service that provides a means of security in the handling of important funds and documents. They are an unbiased, third party. The California Escrow Law, provides the legal definition of escrow. “An escrow holder works with the Buyers, Sellers, Realtors, Lenders and Borrowers (“the principals”) involved in a transaction to assure funds and documents change hands at the appropriate point in time, after preset conditions have been met.”what is escrow?

After the principals agree upon an escrow holder, the group must provide the holder with a set of written instructions, mutually agreed upon by all parties. The escrow holder then keeps all important documents and funds until the written conditions are met for dispersal of these items. When all contingencies of the escrow instructions have been met or achieved, the escrow can be closed.

The funds are released once all obligations on both ends have been completed. This way the buyer is putting up the money, but the seller doesn’t get it until certain criteria have been met, like the buyer releasing their contingencies or their loan being funded.

In Practice

Escrow can help protect all parties from risk during a real estate transaction: the buyers, sellers, agents, and lenders. The account ensures the buyers are acting in good faith (that they have deposit and down payment needed), gives time for the seller to meet obligations and shows all other involved parties that the sale is on its way to becoming final.

Before you can buy your home, you have to pay closing costs. These are the various fees and charges a homebuyer must pay just before being able to close on the property. When it comes to closing costs, the buyers often pay a number of months’ worth of homeowners insurance and property taxes in escrow. This is usually required by their mortgage lender.

Escrow prepares a final closing statement near the close of escrow, showing all parties an itemization of the charges and credits to the account. The statement will reflect the purchase price, payoff of existing loans, the costs for all services, and the amount of the funds each party is entitled to at closing.

For more information on this topic:

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Ryan@RyanYourRealtor.com
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