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What is Escrow in the Mortgage Process?


Feb 18, 2022

The term escrow often comes up in the context of property sale, purchase, or in the management of property taxes and insurance. As technical as it may sound, the definition is simple. Escrow refers to a legal arrangement through which a third-party is hired to hold money, documents or property on behalf of the buyer and/or seller. This third-party can typically be a title company, a law firm or an escrow company. The items that are being held are then disbursed or made available when specific conditions are met.

The two most common examples of escrow are encountered during the property purchase phase of the mortgage process, and often after the sale throughout the life of the loan to help manage property taxes and insurance.


Escrow

During the sale/purchase
As an example, when you find your dream house for sale within your budget, the next step is to make an offer to the property owner. This usually requires making a good faith deposit (sometimes known as "earnest money") to make sure that the seller is taking your offer seriously. That deposit is then kept in an escrow account - it is not sent to the property owner directly. If the seller accepts the offer and all goes well, the earnest money is then applied to the down payment or used to cover the initial costs of purchase. The buyer's deposit stays in escrow with a third party unless and until all conditions are met for a sale.

After the sale of the property
Escrow accounts can also be set up to help mortgage borrowers to manage their property taxes and insurance.

When is Escrow a Good Idea?

Escrow is not mandatory, but you may want to consider it if any of the following apply to you:

  1. The transaction amount is large, which is usually the case for property sale and purchase
  2. The buyer would like to check and confirm the quality of the property before finalizing the purchase (example: a safety inspection)
  3. The service provider or seller needs assurance of payment before completing work
  4. The homeowner does not want to pay a large lump sum for property tax and insurance, and would rather pay in smaller increments throughout the year

Who Can Access the Escrow Account?

You may be wondering who has access to the funds in escrow. This depends on what type of service you are going to use the escrow account for. If you are using an escrow account as a homeowner, the mortgage lender will then have access to it. The funds will be used to pay for home insurance and property taxes so that you don't have to worry about paying a large lump sum or keeping track of due dates. If you are using the escrow account to make an offer on a new house, the real estate agent involved in the deal from your end will have access. If your offer is accepted the real estate brokerage will then use the deposit to make the down payment and finalize the deal.

Summary

The purpose of using escrow in real estate/mortgage transactions is to ensure that all parties involved in the transaction are protected (buyer, seller, bank or lending institution). It is a tried and true part of the mortgage process. If you have any questions about escrow or any other part of the mortgage process, please do not hesitate to contact our branch and we will be honored to help.

 

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