How Escrow Works

What is Escrow?

First, a little about "escrow". When you're closing on your new home, a neutral, third party (known as the escrow holder or the escrow agent) is used to make sure the process will close correctly and on time. When funds are held by a third party in a transaction between a buyer and a seller, it's in escrow. For example, in a Web purchase, PayPal is the secure third party that obtains the buyer's cash, and then disburses the funds to the seller. 

The escrow agent insures that all terms and conditions of the seller's and buyer's agreement are reached prior to the sale being finished. This includes securing monies and paperwork, signing required forms, and seeking out the release documents for any loans or liens that are to be paid off with the transaction, assuring you have a free title to your property before the agreed upon price is fully paid.

Escrow holders compile the following forms:

Fire and other insurance policies
Title insurance policies
Terms of sale and any seller-assisted financing
Requests for payment for various services to be paid out of escrow funds
Loan documents
Tax statements
Closing on the house happens when all of the procedures of the escrow are complete. All debts and fees are taken and paid off at this time (covering expenses such as title insurance, inspections, real estate commissions). You'll then get the title to the home and the title insurance gets dispersed as noted in the escrow instructions.

When closing is completely finished, you'll make a payment to the escrow holder. You'll know when it's time to submit the form of payment.

The Escrow Holder Will:
Assemble escrow instructions
Perform a title research
Meet lender's standards as written in the escrow agreement
Receive funds from the buyer
Prorate interest, insurance, tax and other payments according to instructions
Record deeds and other documents as instructed
Obtain title insurance policy
Close escrow when all terms of agreement of seller and buyer are met
Disburse payments and finalize instructions
The Escrow Holder Will Not:
Tell you what's best - the escrow company has to remain an impartial, third-party status
Give insight about future tax estimations
The Escrow Holder Will:
The Escrow Holder Won't:
Assemble escrow instructions
Petition title inquiry
Comply with the bank's requirements as written in the escrow agreement
Accept funds from the buyer
Prorate tax, interest, insurance and other fees according to guidelines
Record deeds and other legal documents as instructed
Request title insurance policy
Close escrow when all instructions of seller and buyer have been finished
Disburse monies and finalize instructions
Give advice - the escrow agent stays a neutral, third-party status
Dispense opinions about the outcome of your taxes
Mortgage Escrow Account
Creating a Mortgage Escrow Account helps keep track of on-going expenses while there's a loan on your house. Though most home buyers make payments via their monthly mortgage payment, Escrow Accounts are deposited into at closing as well.

Now you know more about how to close on your future home. And, you can be a better informed home buyer and future homeowner.