What Is Escrow? Keep Your Money Safe

What exactly is escrow and how does the process work? These best practices help keep your money safe

Escrow is one of the most important, yet often most confusing parts of buying and selling real estate. What exactly is escrow? How does the escrow process work? What best practices can help keep you and your money safe?

What is Escrow?

The easiest way to think about and define escrow is as a neutral third party who holds, title and money until the time of closing, so everything is exchanged safely, fairly and simultaneously.

You don’t want to pay the seller of a home until they are ready to hand over the keys and ownership, right? As the owner, you wouldn’t think of handing over the title to your property and keys until you get paid, right? An escrow company is the key to making sure no one gets shortchanged in the process and ensures you're properly putting money in escrow.

How the Escrow Process & Real Estate Closings Work

  1. A contract is signed by the buyer, seller and their respective brokers stipulating the terms of the transaction
  2. The buyer places an earnest money deposit into an escrow account
  3. The escrow officer confirms clearance of funds with all parties and keeps the money in the escrow account until the close of escrow
  4. Title work is started along with the mortgage application and underwriting
  5. Once all underwriting conditions are met, the closing is scheduled
  6. The buyer brings the balance of cash required to close to the escrow officer
  7. The mortgage company sends their funds to the escrow officer
  8. All accounting is laid out on the Closing Disclosure
  9. The escrow closing docs are drawn, signed, and notarized
  10. Funds are released to seller, the title is transferred, and the buyer gets the keys

Escrow for Buyers

An escrow company, via an escrow officer, holds your earnest money deposit from signing the contract to closing. They are a neutral third party, who will abide by the terms of the contract if there are any disputes, or the transaction is cancelled. Buyers will traditionally wire the balance of any additional funds due at closing to the escrow company, to be held in their escrow funds account in the last few days before closing. Any mortgage loan proceeds you are borrowing will also be held in escrow until all closing documents are signed. This way you are never just gambling that the seller will hand over what theyare supposed to after receiving your escrow money.

Your escrow officer makes sure that the seller credits you with any amounts due for property taxes for the year, and that all liens, such as mortgage loans, are paid off. You don’t want to just trust the property owner will pay off their mortgage instead of running off to the Maldives. The escrow company handles this, so you don’t have to worry.

Escrow for Sellers

Escrow is a tool for giving sellers confidence in the process and contract. You can verify the buyer has put up the agreed upon earnest money deposit, and all funds are cleared before signing the deed transfer and giving the buyer access to the property.

Escrow for Real Estate Brokers

Escrow serves three main purposes for real estate agents:

  1. To secure the contract by having a deposit held in lieu of closing
  2. To keep clients safe in the transaction process
  3. To protect commissions and ensure fees are paid directly from the closing

Here at Access Home Closing, we’ve streamlined the closing process to make it easier for brokers, buyers, and sellers.  Our robust feature set includes a progress tracker, task list, in-app messaging, and real-time alerts. You’ll always know the status of your transaction’s timeline and what you need to do next.

Best Practices for Escrow

Each party is typically looking out for their own interests in a real estate escrow transaction.

One of the potential cons for buyers at closing is the impact on cash required to complete the close of escrow, as a result of impounds for property taxes and insurance coverage. Depending on what day and month you are closing, the escrow officer will collect several months’ worth of payments to ensure these bills are paid. You can talk to your escrow officer about how to minimize this amount and the impact on cash due at closing.

As a buyer, seller and agent, you should receive a copy of the Closing Disclosure,three days before the closing is scheduled. Make sure you review it carefully, ask questions until you understand it, and ensure all funds needed to close are liquid and available.

Is escrow safe? Escrow is generally a very secure process. However, one of the biggest risks in this process today is wire and escrow fraud. Hackers and cyber criminals have been increasingly targeting real estate agents and their clients due to the large sums of money in escrow. They will often hack and spoof email accounts, sending fake wire instructions or hijacking bank accounts. Be sure to check where money should be sent directly with your escrow officer through a trusted line of communication, prior to sending. At Access Home Closing, we operate in a secure platform to protect against wire fraud.

The whole process of signing physical documents, wiring money, and holding money for days or weeks during the process is definitely outdated. New technology, electronic signatures and online money transfer systems, for instantly recording a sale and transfer of an asset will all help modernize, speed up, and secure the process of buying and selling real estate. As these things become integrated in the industry, make sure you do your homework and select a title and escrow company with a good reputation who will work on your behalf in the transaction.

Access Home Closing's desktop and mobile platforms are both secure and easy to use.  They allow you to manage your closings from any device seamlessly. Our platform is built with state-of-the-art SSL encryption and secure servers to provide bank-level security. You can confidently deposit earnest money, upload documents, and e-sign from virtually anywhere.

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