How Escrow Works
A house is the most expensive purchase most people make in their lifetime. Since the purchase is so large, securing funding for your home may take longer than the actual sale. The company that manages the funds for the house until closing is called the "escrow company," "escrow agent," or simply "escrow."
What is escrow?
An escrow company or agent is an independent third party that handles aspects of the purchase and related loan transaction. The escrow company will often:
- Hold the down payment until the closing,
- Receive the amount of the loan from the lender,
- Transfer the down payment and mortgage money to the seller,
- Transfer and record the deed of title to the buyer or title company, and
- Make sure the lender is protected by filing and recording the mortgage with the local county recorder of deeds.
Who handles escrow?
In some states, the escrow functions are handled by a licensed title insurance company or an escrow company. However, in others, an attorney handles the transaction. In many states, escrow agents must be properly licensed in order to conduct business. In addition, the escrow agent must be someone who is not otherwise associated with the transaction. For example, the buyer's real estate agent or the seller's attorney cannot hold the escrow account. They may, however, recommend escrow agents that they have used before.
How does escrow fit into the home buying process?
The home buyer and seller usually pick an escrow agent while negotiating the purchase agreement. They can also draft specific instructions to the escrow agent. The agent will then collect the buyer's earnest money deposit, along with copies of the purchase agreement and any other paperwork.
The buyer will then work with a lender to finalize the mortgage. That can involve:
- A home inspection,
- A title report and title insurance,
- Acquiring homeowner's insurance,
- Comparing the final mortgage offer with the good faith estimate, and
- The final walkthrough.
After these steps are completed, the escrow agent will collect the loan money from the mortgage. That money, along with the down payment, is then transferred to the seller at closing.