Why is “escrow” needed when purchasing or selling real estate?
The exchange of cash for a property is not as simple as you might imagine. Most processes in real estate include numerous financial hurdles to jump over. One thing escrow provides is protection for the parties involved leaping over those hurdles; it’s kind of like putting on knee pads or a helmet.
Whether you are lender, seller, or buyer, you want to make sure that no property, assets, or funds change hands right away. This is where the importance of escrow comes in. Certain transaction specifications are required for anything to happen. The holder will manage consumer privacy and protect important documents and funds.
The contract for purchase usually has many intricate terms in place for the money used in the purchase. The escrow procedure includes the deposit of a decided amount of money by the agent into a bank account. This will be payable to the seller once the agreed contract terms are complete.
In real estate, there are two types of escrow accounts that are a part of the home-buying process.
Mortgage Escrow Account
This account is opened by the mortgage lender to pay certain property-related costs. If an escrow account is part of the loan, then monthly payments would be issued for insurance and taxes. The cost of the monthly mortgage would be included as well.
These monthly payments are deposited into the escrow account by the mortgage servicer. Then, the mortgage servicer uses the money to pay the bills when due.
Real Estate Escrow Account
This kind of account is also known as pre-closing escrow accounts. A third-party holds the account entities separate from both the property, seller and the buyer. This protects the interests of all parties involved in the transaction. These accounts contain all paperwork, funds, and instructions required for the real estate transaction. This includes the property deed and an upfront payment for the home.
Escrow Provides Protection for Everyone
In a real estate transaction, an escrow account offers protection to both the buyer and seller. For example, what if the buyer decided to stop the purchase with no genuine or lawful reason? The buyer would have to forfeit a portion of the money to the seller.
For buyers, what if the house is not in the condition as guaranteed? Or what if repairs are required? The seller then needs to consent and adjust as the purchaser demands. As protection, the seller just can’t withdraw from their pledge. They won’t have the capacity to get any part of the cash until the issue settles.
An escrow account gives a level of security you simply couldn’t get otherwise. Without it, you would need to pay money directly to the seller. Although most people are trustworthy, there have been instances of mishandling funds.
This is why an escrow operator holds the funds in an account that neither the seller nor buyer can access to guarantee that fraudulent activities do not happen.
Regardless of whether you are selling or buying a property, using an account like this to hold your money is crucial. Escrow offers protection to all parties as they experience what will presumably be one of the most complex transactions of their lives.
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