You probably have heard the terms ‘escrow on a house’ or ‘ the home is in escrow.’ But what does all that really mean?

Escrow, in real estate, is defined as an impartial third party who holds a valuable asset, most likely cash, until the transaction is complete. It is the most important and most protective role in the home-buying process, so it is very important to understand!

Before purchasing a home or before any inspections are done, mortgage lenders or escrow agents typically ensure that the buyers have a real estate escrow account. Once the buyer and the mortgage lender are notified and have proof that the desired property is in satisfactory condition, passed inspection and all conditions have been met for both parties, the money held in the escrow account is released on the home purchase closing date. 

How does the escrow account work? During the purchase of a home, the buyer puts a decided amount of cash (usually between 1-3% of the home sale price) into an escrow account after their offer has been accepted by the seller. This money is held by the bank or mortgage lender until the sale of the home is absolutely finalized – that is “being in escrow” which typically lasts up to 30 days. This money cannot be touched during that time and when the sale is finalized, the cash gets put towards the overall home sale price.

Mortgage loaners also use this money in an escrow account to pay for property taxes and home insurance for the buyers in order to not fall behind on bills. Even after you own the home, the money you pay to your lender also goes into your escrow account to continue paying for taxes and insurance when the bills are due.

While it may seem like a pain at first sight, escrow accounts are truly a safeguard for both the buyer and seller. If a seller doesn’t hold up an end of a deal, like fixing a roof per se, escrow ensures that they won’t receive payment until it is fixed. Also, on a sellers end, say buyer decides to back out last minute, escrow money is forfeited to the seller.

Talking with your real estate agent can help clear up any grey areas when it comes to purchasing or selling your home. We are here to help and make the transaction as smooth as possible and for you to understand the entire process.