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Types of Escrow Accounts and How They Work

What are escrow accounts and how do escrow accounts work?, Before we can get into the details, let’s first define what escrow is.

Escrow is a process that takes place during the home buying process. Think of it as a form of safekeeping. So, between the time of a purchase agreement and the closing of the house, all documentation and funds related to the purchase are held by a neutral third party.

Furthermore, escrow companies make sure:

  • That all parties involved uphold the terms they agreed upon
  • That the paperwork is kept in order
  • That the funds for each party is accessible

When going through the home buying or home selling process, it can be helpful to have an escrow company looking out for you and helping you keep track of everything.

With that being said, there are numerous types of escrow accounts you can open. These accounts include:

  1. Independent home sellers or buyers
  2. Real estate sales escrow
  3. Mortgage escrow
  4. Renters escrow
  5. Construction escrow

Now let’s break down what each of these types of escrow accounts would look like during the house buying process.

types of escrow accounts

1. Independently Buying or Selling a Home

As a buyer, you may not want to blindly trust the seller and give them your money directly. Therefore, it is common for buyers to include earnest money deposits.

The deposit is usually 1-2% of the offer price and it is a show of good faith to the seller that you take the transaction seriously. It is important to understand that if the buyer pulls out of the deal for unapproved reasons outside of the contract, the seller gets that money, and visa versa.

2. Real Estate Sales Escrow

Real estate escrow accounts are for the real estate company. What we mean by this is that when your earnest money is deposited into the account, it is insurance to the real estate company that you will not use that money for other expenses.

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The only times it would be acceptable to get that money refunded would be in states of emergency. Otherwise, it is expected that the buyer upholds their end of their agreement.

3. Mortgage Escrow

As for mortgage escrow, this is where things cater to the homebuyer. This type of escrow account is the way to pay your fees monthly.

Fees you’re likely to encounter are:

  • Homeowner association fees
  • Property taxes
  • Mortgage insurance
  • Homeowner’s insurance

In addition to not having to pay all of this at once, there are protections in place for both borrowers and lenders. Meaning, there won’t be minimal or overly excessive amounts of money in the account.

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All of this breaks these annual payments more manageable that you can keep up with.

4. Renters Escrow

Renters escrow accounts are useful as security deposits and in the case of disputes.

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In some states it is required that landlords keep security deposits in an escrow account. It is a safety measure for the renters, ensuring that they’ll get their money back. Also, if repairs need to be done, the funds to fix those would be there as well.

Concerning disputes, if a landlord doesn’t address their renters needs then the renter may get away with not paying rent depending on the terms of the lease. If that’s not the case then it is just a measure in place to protect the landlord and ensure that they get their payments.

5. Construction Escrow

One of the least common types of  escrow accounts is the constriction escrow account. These are only used by construction professionals.

They use them for their construction loans. Homes that are either being remodeled or under construction qualify for these types of accounts.

This process means that the contractor lists the stages of construction they will conduct and agrees to finish their job in those stages. They then provide an estimated cost for each of those stages.

The bank will deposit their payment as they complete the processes and a third party puts them into escrow for the contractor to request.

These types of escrow accounts can be set up by either the project owner but it is very common for the account to be created by the lender with a title company of said project.

Start Your Escrow Account With New Venture Escrow

Escrow accounts help all sorts of transactions flow smoothly. That being said, there is no better escrow company that is as committed to offering the high quality service and transparency, as New Venture Escrow!

For more information about escrow or setting up an escrow account, feel free to reach out to New Venture Escrow!

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