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The Escrow process is simply a way of putting money or a deed, in the possession of a neutral third party until specific conditions are met.

Escrow agents or companies frequently manage and oversee transactions in real estate to ensure a smooth process. When a deal completes, a loan servicing organization may set up an escrow account in the interest of the borrower. They save part of the borrower’s monthly installment for insurance and property taxes.

Significance of Escrow

Escrow is necessary for any real estate purchase because it protects the parties involved in the transaction.

Let’s assume some cash is put down that went straight to the property seller. But after that, a sales term with the seller couldn’t be reached. The buyer doesn’t need the seller holding any money hostage. In the same way, the seller has no desire to sign over the deed to the home until it’s paid for. The escrow process guarantees everybody gets what they need.

Escrow Function

 

Escrow Function - Real Estate

First, the estate agent of the party involved submits a purchase agreement to the escrow holder. The escrow holder will then write guidelines according to the law where the purchase agreement is taking place. As part of the guidelines, an escrow holder can ask for payoff requests, money or payment of other necessary invoices.

An escrow account for hazard insurance and property payment taxes work comparatively to a savings account that requires a monthly deposit. When the property insurance or taxes are due, the bank will withdraw funds from the escrow account to pay the costs.

If there is any cash in the escrow account toward the end of the year that is more than the required minimum, those funds are refunded.

Escrow Holders and Lenders

During the mortgaging process, the escrow process is just as helpful. Terms like “reserves” or “impound” may be mentioned during the negotiations. That’s OK since they all have the same meaning. Reserves are held by the lender to make installments for the property taxes and the mortgage holders insurance.

Lenders will collect the loan payment every month and will pay the insurance bills and taxes. The lender has a personal stake in ensuring those installments are made. Anything “prepaid” is cash collected ahead of time to guarantee payment of those bills when they are due.

Hold-Back of Funds in Escrow

 

What is Escrow - Hold Back of Funds

Hold back can occur when the property ownership transferring process completes while escrow funds are still on hold. For example, let’s say an agreement was made to allow the property seller’s family to remain in the house for a bit. If that is the case, a “rent-back” agreement would need to be signed. This requires the property owner to pay a daily or monthly rate for the length of the time they’ll remain in the house.

On account of such a leaseback, the real estate agent will have the escrow agent hold back parts of the property owner’s proceeds. If the property is not in the agreed upon condition during the last walkthrough, escrow found can be held to pay for those expenses as well.

Escrow and Closing

Escrow closing is when the purchase is complete. The escrow officer will handle the exchange of funds, oversee the final paperwork and handle the deeds recording. The agent will guarantee that all necessary conditions are met, and the documents are signed and recorded. Finally, the agent will ensure that the cash is disbursed properly before closing.

The escrow process can be eccentric and unpleasant for everyone involved. Yet, it is safe to say that escrow is necessary when trying to purchase or sell a property. A successful escrow is typically the result of a skillful team of professionals working together to lead the buyer/seller through this brief, but critical, arrangement.

 

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Read this other post we did on: How To Open Escrow

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