Entering the housing market means encountering a new terminology that can sometimes be confusing. If you are not familiar with the real estate world, you probably have never heard of some of these words, or you know of them from another context. Not knowing what things mean may bring you to uncomfortable situations and risk getting frauded.
One of the terms frequently used in real estate is ‘’escrow’’, and we decided to help you answer the following question – what does ‘’in escrow’’ mean in real estate. This information will most likely be helpful for you near the end of the homebuying process, but it doesn’t hurt to know what awaits you beforehand.
What is a Real Estate Escrow?
A real estate escrow is an impartial third party in a home buying process. It holds the buyer’s funds until all the contingencies are satisfied by every actor involved in the real estate transaction. The escrow company is an entity that provides escrow services and works as an unbiased short-termed proprietor of the funds.
Essentially, companies such as Lightspeed Escrow specialize in offering these services to protect both parties from any type of fraud. To summarize an escrow process: a buyer transfers the money onto a shared escrow account, but the seller cannot withdraw until all the requirements have been filled. Furthermore, the buyer cannot cancel the escrow payment without proving that the seller did not meet the agreed terms.
Who Are Escrow Officers?
An escrow officer or escrow agent is a representative of the entity that provides escrow services. Apart from the escrow companies, other subjects, such as banks, title companies, and real estate agencies, can hold the escrow payment.
An escrow agent does more than holding the funds, as they are responsible for making sure everything goes according to the agreement. Title companies and real estate escrows can be interchangeable in some cases, so the escrow officers hold not only funds but also the deed to the property. When this happens, you can say that a property is ‘’being in escrow’’.
Who Chooses an Escrow Company?
Each party involved in a real estate transaction has the right to choose an escrow servicer, but the seller has the upper hand in making this decision. Usually, it is the lender or the broker that will recommend the company, but you can object to the arrangement.
Sometimes people confuse an escrow agent and a trustee because they both have the role of holding some assets in the trust. However, a trustee works to protect a beneficiary’s assets, while an escrow officer keeps a neutral position in the process.
Who is Protected by an Escrow
An escrow protects all parties involved in the real estate transaction – the buyer, the lender, and the seller. The purpose of escrow in real estate is to ensure precision in the transaction, without anyone having to risk their assets.
A lender benefits from an escrow by following the money and knowing that the loan amount goes to the right place. A buyer can in good faith transfer thousands of dollars into an account without the fear of losing them before getting the ownership of the property. On the other hand, a seller does not want to transfer the title to someone without being sure that they are a serious buyer.
In case of a disagreement, an escrow holds the funds until it is resolved. Canceling a purchase once in escrow is possible in some cases, but it is not favorable towards the buyer’s deposit. If the deal falls through – meaning that both parties agree to step away from the transaction, the assets will be brought back to their previous owners.
Sign of Good Faith
Earnest money is what we in real estate call the money a buyer transfers to an escrow, as a sign of good faith to the seller. Earnest deposit is not always obligatory – but it speeds up the closing process and tells that you are serious about buying the property.
Earnest money is later added to the down payment and closing costs, so it is not an addition to all the costs, but rather a preemptive sign of interest. This sends a message that a buyer is interested in that particular house and that they didn’t make multiple offers – just this one.
How Long Is the Escrow Process?
The escrow process is as long as the closing process, and it lasts from making an offer until signing the documents. It usually lasts for about a month. Escrow holds up to 3% of the purchase price, and until the closing, the funds are inaccessible to any party involved in the transaction.
The length of the escrow period depends vastly on the outcome of the inspection. If there are some major mechanical issues, the whole process is put on pause until it is resolved. The repairs at this point in the process mainly happen when the lender deems it risky to invest in a faulty property.
Other Types of Escrow in Real Estate
Escrows exist in many fields of work that imply some type of transaction, and a housing market has two kinds. The one we explained in this article is real estate escrow, which holds funds during a home buying process. On the other hand, an escrow account is something different – it is a separate account opened by a lender to collect additional homeowning costs after closing.
An escrow account will collect tax payments, insurance fees, and other annual costs in monthly installments and the monthly mortgage payment. The lender collects these funds and then pays them when they are due. This ensures that a homeowner does not have to think about these costs, and it adds up to the monthly payment, so they usually don’t feel the cost.
Most of the escrow process is done by real estate professionals, and it is not expected of you to know what to do. However, for either type of escrow, it is smart to know at least the basics of the process and its importance. Not understanding what is happening can lead to you losing your money or your property.
