If you’re new to the business of buying a home, you may not be familiar with the term escrow and how it works in a real estate transaction. It’s important to understand the basics since it involves what happens to your money during the buying process.

What is escrow?

The simple definition of an escrow is when a third party looks after funds, or another item of value, while a transaction is being completed. The individual is said to be holding the money, or the item, “in escrow” and is responsible for its safekeeping for a period of time.

How does it work?

When you’re meeting with your real estate agent to draw up an offer on a property that you’d like to purchase, you’ll be expected to provide an amount of money as a deposit. These funds are held in an escrow account. The real estate brokerage that you’re working with may suggest a third party, such as a lawyer or escrow company, to hold the funds.
Once you’ve negotiated the final sale price for the home with the seller, both parties will agree in writing what other conditions are required to be met before the sale is completed. This could include, for example, a final property inspection. The buyer is then responsible to provide the remainder of the purchase amount (minus the deposit) to be held in escrow. The escrow company will subsequently release the money to the seller and the property deed to the buyer on the closing date.

What is the benefit of an escrow account?

An escrow account gives both the buyer and the seller peace of mind that the money deposited is held securely by an impartial third party that doesn’t have any interest in the sale of the home. In other words, it offers protection for both parties in the real estate transaction that the funds are safe and will not be released until all conditions have been met in the sale and everything is in order.

Do I need to know anything else?

You might be interested to know that you could also have another type of escrow account with the bank that holds your mortgage. Sometimes, buyers will enter into an agreement with lenders to make monthly payments, at the same time as their mortgage, to cover property taxes and insurance that the lender will hold in escrow and payout at the end of the year. This is referred to as a lender escrow account and banks typically have a trusted third party that they work with to manage these accounts. For the new homeowner, this can be a convenient and worry-free way to handle property tax and insurance obligations.
If you have any questions about escrow, don’t hesitate to reach out to me!