What Is An Escrow: How Does Escrow Work?

What is Escrow?

Making a very large purchase, such as a house, causes buyers, sellers and lenders to seek reassurance about all the security measures that are in place to protect the funds involved in the closing transaction. Transferring large sums of money and finalizing the details of your sale needs to be done safely and in compliance with the latest security and privacy standards. To help minimize risks during real estate transactions, the escrow/settlement process was developed to protect the buyer, seller and lender.

An escrow account is basically a temporary pass through account held by the escrow holder. The escrow holder is a neutral third party that holds funds and related documents in a secure manner while the parties work through the details of the real estate transaction. Escrow ensures the conditions of the real estate transaction have been met before the property and/or money change hands.

How Does Escrow Work?

The escrow process starts when a party to a real estate transaction (seller, seller’s agent, buyer or buyer’s agent) opens the escrow after a written sale agreement is reached. Upon opening, the escrow holder should be provided with the terms of the sale and the information necessary to carry out tasks. The escrow holder’s duties and the timing of key tasks vary between states.

While your real estate transaction is in escrow, your escrow officer and agent will work with you to make sure the right steps are taken at the right time. Tasks that the escrow holder may complete include:

• Coordinating communications between all parties in the transaction

• Preparing written escrow instructions

• Requesting a preliminary report or commitment

• Requesting a statement of identity (information) from the buyer or seller as needed

• Ordering demands or beneficiary statements

• Receiving bills from home warranty companies, as well as pest, roof, home and other inspection companies

• Preparing or securing the deed or other recordable documents

• Complying with lender’s requirements

• Prorating taxes, interest, insurance and rents

• Receiving purchase funds required for closing

• Coordinating recording of deeds and any other necessary documents

• Closing escrow when all the instructions of the buyer, seller and lender have been carried out

• Disbursing funds as authorized, including charges for title insurance, recording fees, real estate commissions and loan payoffs

• Preparing final statements for the parties, which account for the disposition of all funds deposited in escrow

When all instructions in escrow have been carried out to the satisfaction of each party, the escrow is ready to be closed. With closing, the title to the property is transferred to the buyer, the sales proceeds are paid over to the seller, necessary documents are recorded and title insurance is issued. It is important to note that the escrow holder does not offer legal advice, negotiate the transaction or offer investment advice.