What is Escrow?
Escrow is a bond, deed, or similar document that is kept in the custody of a third party (the escrow agent). An escrow takes place when a certain conditions have been fulfilled. An escrow account sets aside items, such as the buyer’s bank check and the purchase agreement, and places them in an impartial holding area.
How Does Escrow Work?
Escrow protects all parties by making sure that no money is exchanged until all contingencies have been met. If there are any contingencies that need to be completed, such as a home inspection or any repairs, those are to be completed with a contingency release form signed after the repairs are made. Once all conditions have been met and the deal is finalized, the money is transferred to the sellers, and an escrow agent clears the title for the buyer.
How Does Escrow Protect Buyers and Sellers?
The Buyer: If a contingency isn’t met by the final walkthrough, the seller will not get money from the buyer.
The Seller: It’s always disappointing if the deal doesn’t go through. If buyers decide last minute to leave the deal, there is some reprieve for the seller. At the point that buyers have decided to walk away, they have typically given up a portion of money for their earnest money deposit. This money typically totals 1% – 2% of the total purchase price, which has been held in escrow. If buyers back out for no reason, that money goes directly to the seller.
When Is Escrow Used?
After your mortgage closes, a lender will usually require you to open an escrow account to help cover any property taxes and homeowner insurance. After the initial deposit is made, additional payments are made to the account month by month. An escrow agent will release the funds when taxes and premiums are due.
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