What is Escrow and How It Works in Real Estate
What is Escrow?
Escrow is a term that describes the neutral 3rd-party handling of funds, documents, and tasks specific to the closing (or settlement, as it is also known), as outlined on the real estate purchase agreement or sales contract. The purpose of escrow is to facilitate the transaction by managing the disbursement of funds and documents
Buying or selling a home can be overwhelming at times. It’s good to know that there are professionals that can help you in the process.
People Involved in the Escrow Process
A successful escrow process requires a team effort from the following key players:
- Home Buyer
- Real Estate Agent
- Escrow Officer (Real Estate Transactions in California)
- Mortgage Lender
So you’ve signed the sales contract and your transaction is progressing; your real estate professional says it’s time to open an escrow, but what does that mean?
Escrow is the deposit of funds, a deed or other items related to the transaction to a neutral third party for delivery to another party when the transaction or event is completed. When you’re buying a home, you’ll open an escrow account for this purpose.
Escrow provides the assurance that no funds or property will change hands until all instructions for the transaction have been followed and completed. Escrow is obligated to protect all funds and documents while in its possession and deliver them only when all conditions of the escrow have been met. The buyer, seller, lender, borrower or other principles of the transaction create escrow instructions to be signed and delivered to an escrow officer.
Duties of the Escrow Officer
If a real estate professional is involved in your transaction, she will typically provide the escrow officer with all the information necessary to create the escrow instructions and documents. An escrow officer performs many duties, which may include, but are not limited to:
- Adhering to the instructions set forth by the principals and all members of the transaction processing the escrow in a quick and efficient manner
- Closing the escrow when all terms have been met
- Paying all authorized bills fees and charges
- Dispersing funds in accordance with the instructions;
- Providing the closing or settlement statement.
An escrow holder is normally chosen through an agreement between the buyer and seller. If a real estate professional is involved in the transaction, he may recommend an escrow holder. The principles in the transaction, however, have the right to use the escrow holder they feel best suits their transaction. Law prohibits the payment of fees for referrals.
When you are buying a home, you will play a major role in the escrow process. To help facilitate a smooth closing, make sure that you read and understand your escrow instructions. If you have questions regarding the instructions, ask your escrow officer.
That said, your escrow officer is not an attorney. She does not practice law and cannot offer legal advice nor relate personal opinions about the transaction. She simply follows the instructions set forth by the principles of the escrow.
Always respond to correspondence regarding the transaction quickly. This helps ensure a timely closing. Deliver your funds to escrow in an acceptable form. While procedures differ depending on the escrow company, personal cheques used for delivery of funds are often not permitted and may severely slow the closing process possibly by a week or more. Check with your escrow officer for specific instructions on how to deliver your funds.
Questions About Your Loan
Ask your lender, not your escrow officer if you have questions regarding your loan documents. If you are purchasing a home with a new loan, your escrow officer will contact your lender to provide the escrow instructions, preliminary report or commitment and any additional documents the lender requests. The escrow officer is then required to comply with the lender’s instructions. Any questions regarding your new loan should be directed to your lender.
Understand the Closing Statement
Carefully review the closing statement. The closing statement is a written record compiled at the close of escrow that itemizes the charges and credits on your account. The statement will include items such as:
- Purchase Price
- Funds Deposited or Credited to your account
- Payoffs on existing encumbrance or liens
- Cost of all services
- Funds you should receive at the close of escrow
If you have any questions regarding your closing statement, ask your escrow officer. Thoroughly examine all closing documents. These may include a refund check. Safely store your closing statement and other escrow documents for tax purposes. The closing statement will give your accountant necessary information about the sale or purchase of a property as the IRS and other agencies may require you to prove your cost and/or profit on the sale of the property.
Homes for Sale in Cerritos, CA
More Real Estate Tips and Videos
If you’re thinking to buy or sell your house in Cerritos in the near future, you might find the following real estate videos useful:
- Loan Estimate Guide for Mortgage Borrowers (Video)
- Real Estate Contingencies When Buying a Home (Video)
- How to Get a Real Estate Report for Your Area (Video)
Reference and Source of Information: https://www.firstam.com/ownership/what-is-escrow