If you have experienced buying a house before, chances are, you might have heard of the term escrow account. An escrow account is a deposit of funds, a deed, or another asset that one party to a contract will deliver to another party upon completion of a specific condition or event. The account is managed by a third party who is independent of the transaction. Real estate transactions make up most of the transactions which involve an escrow account.

Types of Escrow Accounts

There are two types of escrow account in real estate:

1. Mortgage Escrow Account

This is an account that is set-up by your mortgage lender to pay the other expenses related to the property on your behalf. If the loan includes an escrow account, you will pay monthly installments for taxes and insurance on top of your mortgage payment. These funds will be deposited by your mortgage servicer into the escrow account. The servicer will pay your bills when they are due using the funds in the escrow.

2. Real Estate Escrow Account

These are pre-closing escrow accounts that are held by the third party separated from the buyer or seller. This protects both parties plus the lender. The funds are withheld until all instructions and necessary paperworks of the real estate translation have been completed.

Why Do You Need a Real Estate Escrow Account?

An escrow account is very vital to real estate transactions. It provides protection not only to the seller and buyer but to the lender as well. The third party withholds all the funds and ensures that they will not be transferred until every escrow condition has been met. Escrow conditions are the terms and agreements of all the parties. 

The Escrow Account Process

The process starts with the buyer-seller and lender working together to draft the term of the escrow agreement. The agreement must be thoroughly reviewed, agreed upon, signed by all the parties, and sent to the escrow agent. A third party from the escrow company will review the agreement and will process the funds together with all the documents. A set of escrow instructions is to be followed.

As a common practice, the buyer or an agent representing the buyer will instruct the escrow agent to release the funds after all the conditions that have been agreed upon have been met, the title insurance has been issued and the seller’s deed has been signed. After all the terms have been fully satisfied, the parties will now sign the appropriate documentation. This will only be the time that the escrow will be considered complete.

How Are The Funds Distributed?

Buying a home is a long and exhausting process. The distribution of the fund takes place in the later part of the process. At the “closing” part, the signing of the final paper works for your home purchase takes place. Both parties will sign the final documents and instructions and the escrow agent will return the buyer’s loan paperwork. The paperwork is sent to the lender for final inspections.

After this stage, the lender will grant permission to fund the buyer’s mortgage. The funds will be then transferred from the buyers to the seller leading to an empty escrow account. An empty escrow account is considered a closed account. After the closing of the escrow, the endpoint of the real estate transaction has now been reached. It represents the legal transfer of title from the seller to the buyer. Funds are successfully collected and properly disbursed. The buyer now becomes a new homeowner.

What Happens If The Sale is Not Completed?

There are several reasons why the real estate transaction fails to continue or be completed. A buyer might not qualify for a mortgage or a current or previous problem of the property has come to light during the house inspection. If the transaction has been terminated, then the sale “falls out” of escrow.

If the buyer backs out of a sale without a valid reason, the earnest money that was deposited in the escrow may go to the seller. If the transaction was canceled by the seller, the buyer’s funds will eventually be returned to them. Most purchase agreements contain details on what will happen to the escrow funds in different situations. When drafting an agreement, it is very critical to be very careful and knowledgeable about the transaction. 

Is an Escrow Account Important? 

As escrow protects all parties as they go through the complex transaction of real estate, it is easy to conclude that having a third-party escrow account to hold the funds is very important. This ensures that all the agreement has been satisfied for the buyers, sellers, and lenders making the home purchase a complete success for everyone.

Do You Want To Know More About the Escrow Account?

If you are about to sell or buy a house and you want to know further details about escrow accounts, you can Call us at (386) 871-7697 or leave us a  message at your most convenient time. Our well-trained agents will immediately assist you with all your questions. IF you want more content like this, kindly reach out to us.