What is an escrow?

As a home buyer, understanding what an escrow is and how it works is crucial. Escrow refers to a financial arrangement where a 3rd party holds and manages funds, documents, and other assets during a real estate transaction. It acts as a neutral intermediary between the buyer and seller to ensure a smooth and secure transaction. Here's a breakdown of how an escrow works: 

Once your offer on the home is accepted by the seller, the process of opening escrow begins. You and the seller will select an escrow agent, typically a title company or an attorney, to handle the transaction. 

As part of the initial offer, you will be required to submit an earnest money deposit, which is a sum of money that demonstrates your serious intent to purchase the property. This deposit is held in escrow by the escrow agent until the transaction is finalized. 

During the escrow period, various tasks are carried out, such as a title search to ensure the property's ownership is clear, and inspections to assess the condition of the home. These steps help identify any issues or liens that may affect the purchase / tile. 

If you're obtaining a mortgage, your lender will require you to secure homeowners insurance. The escrow agent will verify these arrangements and ensure they align with the terms of the purchase agreement. 

Escrow allows for contingencies, such as appraisal and financing contingencies, which give you the option to back out of the deal if certain conditions are not met. The escrow agent helps facilitate negotiations and ensures the agreed-upon terms are met by both parties to the transaction.

As the closing date approaches, the escrow agent prepares the necessary documentation, including the settlement statement, loan documents, and title transfer documents. These documents are reviewed, signed, and notarized by the buyer and seller. 

Once all the conditions are met, including the loan funding and the completion of required inspections, the buyer's funds, including the down payment and closing costs, are transferred to the escrow account. Simultaneously, the title of the property is transferred from the seller to the buyer.