Riverside Abstract: What is Escrow? How does Escrow Work?

First-time home buyers don’t always understand the need for an escrow account in the home buying process. It sometimes comes as a complete surprise when they are told that a fairly large sum of money must be put into a seemingly unnecessary account. Fred Coffman, an escrow agent from the title insurance agency Riverside Abstract, explains that escrow plays a vital role in the home buying process, and home buyers really need to get all the facts before buying a house.

Escrow

Escrow is a legal concept in which assets (such as money or property) can be held by a third party on behalf of two other parties who are in the process of completing a transaction. The assets are held by the escrow agent until it receives further instructions or until predetermined contractual obligations have been fulfilled. For example, if you hire someone to do a long and complicated job, you may hesitate to pay them the full amount up-front. The contractor, however, may be wary to wait until the complete job is done before receiving any payment. The money can, therefore, be placed in an escrow account until the job is done. That way, the customer is protected, since the money will not be released until the job is truly complete. The contractor knows the money has already been put aside, he will be able to be fully paid upon job completion.

Real Estate Escrow

According to Fred Coffman, escrow is similarly used in real estate transactions to protect both the buyer and seller during the home purchasing process. When an offer is made on a house, the buyer will often be asked to write a check for a portion of the home price to indicate their seriousness about the deal. This money, however, is not given to the seller directly. It will be put into an escrow account and held by a third party (such as a bank) until all the negotiations are done. It will be paid to the seller only at the time of the closing, as part of the purchase price.

Additionally, the new homeowner may be required by the mortgage company to put money into an escrow account which will be used to pay the insurance premiums and property taxes. The money must be deposited in advance, each month, by the home buyer – in addition to the actual mortgage payment - so that the lender will be able to make the appropriate payments on time.

After all the tax and insurance payments have been made, any excess money in the escrow account will be refunded to the home buyer.