The word escrow comes off more ominous than what it actually is. In fact, if you plan on buying a house, you will most likely find yourself in escrow. In the world of real estate, the term has a few different definitions, but in short an escrow is when a neutral third party holds on to something valuable during the transaction.

 

How does escrow work? 

If you are in escrow because of a recent home purchase, an escrow agent, an impartial third party member, will hold the deed of the house, your down payment, and the mortgage money you just received from the bank. Your escrow agent will then fulfill a few tasks that are required by the sale and purchase agreement. This can include taking out a title insurance policy and securing approval to the home inspection report.

Once the necessary tasks are completed, the escrow agent will pay any closing costs to the seller. The agent will then complete the transfer the property to the buyer by recording the deed and loan documents to the county office.When you hear, “closing of escrow” that is when you will know that your purchase is completed. A closing “escrow officer”,  will make sure that  the money is distributed, the documents are signed, and all conditions are met.

Why is an escrow necessary? 

Escrow is essential to the real estate process, since it protects both parties, the seller and the buyer. For example, if a buyer put down money directly to the seller, but a final sale agreements was not made, the seller could potentially hold the down-payment as a negotiating chip. By the same token, the seller won’t want to sign over the deed to the house, unless the buyer has purchased it. Escrow helps ensure that both members of the business transaction gets what they due at about the same time.

There are a few components that are necessary while in escrow. A buyer must provide earnest money towards a down payment and proof a a mortgage loan approval. Meanwhile sellers must include, property inspections, required repair or renovations, and an inspection of title.

While a property is in escrow, neither the buyer or seller will receive anything from the escrow company until all conditions are met.

How much does an escrow fee cost? 

There is a fee associated with an escrow agent. Typically the cost ranges from 1% to 2% of the final price. Based on the average home value, this translates to about $2,000 to $4,000. Keep in mind that escrow fees are negotiable between the buyer and sellers. Depending on local rules, one party can pay all of the escrow fee or share in its cost.