When you put money into escrow, you’re usually a seller involved in a transaction that is attempting to show the buyer you are serious about the deal. This “earnest money” is a gesture of commitment and good faith that shows that the deal is serious and the buyer is ready to move forward.
This definition applies to both holdback escrow transactions and real estate escrow, and can also be called “good faith money.”
Although both types of escrows have this in common, there are several differences between the two that you should note. For one, real estate escrow applies to home-buying transactions only.
Holding escrow transactions are more broad and encompass a wide range of purchase agreements, including buying expensive goods and services, private capital market transactions such as mergers and acquisitions, stock investments, and online sales.
There are plenty of other differences between the two, which we’ll be delving into during this blog. Escrow accounts serve several basic needs, and we’ll cover each of them here.
1. Who Opens the Account?
For home buyers, a real estate agent will typically open an escrow account on your behalf. Once an escrow company is found and agreed upon, the next step towards fully opening an account for buyers is making an earnest money payment to the escrow servicer.
However, for a general holding escrow account that you need to open, you can simply contact a bank and ask to open an escrow account.
From here, you would offer details about yourself, including why you’re opening the escrow, and information about any other parties involved in the escrow.
2. When Is the Account Opened?
In real estate, escrow accounts have two different purposes, depending on when they are used. They are opened either before or after closing on a house.
Before closing on a house, escrow accounts are used to hold your earnest money. Once a buyer finds a house and puts an offer on it, they give the seller an earnest money deposit.
After closing on a house, an escrow account may be opened by applying for a mortgage. Once you apply and are approved, you will be given a loan estimate for your monthly payments based on principal, taxes, interest, and insurance.
You will then be able to use an escrow account to store your monthly mortgage payments. So, when your taxes and insurance bill arrives, your escrow agent will use the money in your escrow account to pay off those dues.
When dealing with a holdback escrow account such as a large sum purchase transaction, you would open an escrow account once the seller accepts your offer. For a stock investment, an escrow account is opened once you decide to invest in a stock.
3. When Is the Money Released?
For a real estate transaction, once the buyer puts an offer on the home and the seller accepts it, the earnest money deposit gets put in an escrow account.
The deposit will be held in the escrow account until both parties close on the house. This is when the money gets released and goes towards closing costs.
It may also be released for a mortgage when your taxes and insurance bill arrives.
In any other holdback escrow transaction, the money is released at the end of the merger acquisition or online purchase. In the case of a stock investment, the money is received once you sell your stock and transfer funds to your account.
4. Are Interest or Additional Costs Incurred on Earnest Money In Escrow?
In real estate, state law may determine who gets the interest earned on money in escrow.
In California, for instance, homeowners who make mortgage or property tax payments through an escrow account are entitled to the interest earned on that money. Not all states have these types of rules, and it may depend on the bank involved.
On the other hand, in a holding escrow transaction, holdback escrow fees are split between the buyer and seller.
5. How Long Does Escrow Take and How Much Money Goes In?
On average, statistics indicate that the size of a holdback escrow account is $60MM. Holdback escrows are common, with a median of 9% of the purchase price being placed into an account for about 18 months.
In California real estate, the escrow process typically takes 30-60 days to complete. The timeline can vary depending on the agreement of the buyer and seller, who the escrow provider is, and more. Ideally, however, the escrow process should not take more than 30 days. Escrow typically represents 1% to 2% of the final home purchase price.
New Venture Escrow Can Help With All Your Escrow Needs
Looking to get involved in a large sum transaction soon? Whether you’re a prospective home buyer or considering a different deal, the Escrow Officers at New Venture Escrow have your back.
We have all the answers you need on escrow and are skilled in various transactions to help make your purchase smooth. Contact us today to get started!
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