Defining the steps in an Escrow transaction
Escrow refers to the process by which a neutral third party holds money, property titles or deeds, or other securities during the transaction. Money is placed into an escrow account during a large-scale transaction, such as a real estate deal. Escrow holders are typically companies established to provide escrow services. Your real estate agent or bank can refer you to an escrow company during a real estate transaction.
Sometimes you may hear about waiving escrow. This means the bank agrees to waive an escrow account, assuming the borrower will pay all the costs usually taken out of escrow directly to the various parties during the transaction. While this seems like a great deal, the banks also charge a fee to waive the escrow. Before deciding to waive escrow, do your homework, as the costs can quickly add up with buying a home.
Why You Need an Escrow Account
An escrow account is usually required before closing on a real estate transaction. Mortgage lenders and banks require an escrow account to ensure all costs are met during the closing. Because the escrow agent cannot release funds until all sale conditions are met, buyers and sellers are assured they have the necessary legal paperwork and other matters settled before closing the transaction. An escrow holder protects everyone’s interests in a real estate transaction.
The Role of the Escrow Holder
The escrow holder must meet all transaction conditions before releasing the funds. The escrow holder prepares the instructions, requests the title search, and purchases the title insurance. Next, the escrow holder reviews with the bank or mortgage holder any requirements for the transaction to make sure those conditions have been satisfied before releasing the funds.
Buyers must turn funds over to the escrow holder to meet the conditions of the transaction. The holder puts these funds into an account called an escrow account.
The escrow holder examines tax, interest payments, and any other payments needed for the transaction. They may pro-rate them accordingly.
When the escrow holder has completed all instructions from the buyer and seller, they close the escrow account and all the necessary legal paperwork transfers to the appropriate party.
Escrow holders cannot advise buyers or sellers during the transaction. Their status as neutral, third-party members during the transaction provides both the buyer and seller some protection. As impartial parties in the transaction, they can’t tell you what you should or should not do if you should proceed with a trade or similar advice. They also cannot advise you on tax or legal matters. For these issues, find a reputable, experienced accountant or lawyer.