Getting to Know Escrow: The Basics
If you are looking to buy a house, make investments in stock, or any other sort of major financial transaction, you may need an escrow agent.
You’ve probably heard of escrow as a term associated with big financial companies, but what exactly is escrow?
This guide will introduce you to some of the basics of escrow to get you more familiar with how the process works.
What is Escrow?
Escrow is a term that can be applied to several different types of transactions. It can be for big real estate purchases or smaller online transactions. The main concept of escrow is there is a third party involved in a transaction in order to neutralize the process and ensure the integrity of both parties.
The respective “middleman” may hold money, request paperwork, and secure any other assets from either party.
The official definition from Investopedia states that “Escrow is a legal concept describing a financial instrument whereby an asset or escrow money is held by a third party on behalf of two other parties that are in the process of completing a transaction.”
Escrow companies work to ensure that the agreed-upon terms are upheld by both parties.
Responsibilities of an Escrow Provider
Essentially, an escrow provider may act as a referee for a transaction. Some examples of duties an escrow provider may perform are:
- Receiving assets
- Disbursing funds
- Requesting information
- Requesting funds
- Closing instructions
- Ensure the safety and validity of both parties
When Does Escrow Start?
Before the escrow process actually begins, you should begin with research on different potential escrow agents. You may want to do your own research and find your own partner or take the advice of your real estate agent or a trusted business partner, depending on what your transaction or purchase is and who you are working with.
You want to make sure you are comfortable and knowledgeable about who you will be working with.
Eventually, the real start to escrow begins once you deposit the necessary paperwork and funds to the escrow agent. This is known as “opening the account”. The entire escrow process typically takes 30-60 days from open to close.
Escrow in Real Estate
It is most common to use escrow when buying, selling or refinancing a house. Typically, your real estate agent will already have a list of trusted escrow providers, but you still want to do your research and make sure they seem like a good fit for you.
The escrow agent will work with your party and the other party to make sure that all of the required paperwork is accounted for and all parts of the contract are upheld.
For example, an escrow agent may be used to assure that a home inspection is done on time, or that all disclosures are resolved. The buyer and seller should both agree to these conditions, and the escrow agent makes sure that the conditions are actually met by both parties on the agreed-upon timeline.
Additionally, the escrow agent will need an extensive amount of paperwork. It will differ depending on if you are the one buying or selling the home, but some examples of the documents you will need to provide are:
- A Copy of the Offer
- The Sellers Disclosure Packet
- HOA Documents and Transfer Fees
- Proof of Funds
- Documents for Deed Transfer
If you are able to provide all of your documents on time to your escrow agent, the process will be much simpler, so make sure you are aware of what you will need.
Initial Escrow Payment at Closing
The initial escrow payment at closing, also known as earnest money or good faith money, is deposited and held “in escrow,” and at the conclusion of the agreement, that money is then applied to the purchase price.
The payment could also be refunded to the buyer or forfeited if either party fails to meet all of the requirements of the deal.
Escrow closes when the earnest money is disbursed all the way through to the seller and the title is recorded in the name of the buyer. It is the escrow agent’s job to finally process all of the funds and paperwork that they had been holding.
How Much Escrow is Required at Closing
In order to close the deal, all of the conditions need to be met by both parties. You will need to prepare all of your final documents, and there is almost always a final walk-through of the house you are buying.
Once you are ready to close, you will make the payment.
According to Framework Home Ownership, “As part of the closing costs, lenders often ask buyers to put in two months of estimated property taxes, mortgage insurance payments, and homeowners insurance payments. Sometimes you have to pay the entire first year of homeowners insurance up front and immediately start making escrow payments for next year’s bill.”
The lenders account for a buffer or a cushion to ensure that there is enough money in the escrow account.
Learn More About Escrow
If you want to learn more about escrow, real estate, or other general business strategies, contact us at New Venture Escrow. We can provide you with the tools and information you need to be confident in your financial decisions and our expert agents will help you every step of the way.