What Is An Escrow?

An escrow, in the very basic sense of the word, means placing money or documents with a third party for safekeeping until the contract has been fulfilled. In other words, an escrow company is just a neutral, third party hired to shepherd the deal.

Why Do I Need an Escrow?

During the purchase of a home, an escrow ensures that nothing will change hands until all of the events of the agreement have taken place. According to the law, the escrow holder will safeguard funds and documentation until every condition of the agreement has been met. Once everything seems to be in the right place, the escrow holder will distribute the funds and paperwork to the appropriate parties in a timely manner. The buyer, seller, lender, and borrower all have written escrow instructions that are created, signed, and delivered to the escrow holder. If a real estate agent or broker is also involved in the transaction, he or she will usually take care of the preparation of these materials. The escrow holder will then review these written escrow instructions, and once they are met, the escrow is closed. Every escrow is different, though most will be similar in some aspects.

How an Escrow Works

The duties of the escrow officer may include following the instructions given to him or her, paying the bills associated with the transaction, handling the funds and documents with regard to the instructions, and closing the escrow when it is time to do so. The instructions given to an escrow officer can include the way her or she will get and hold the purchase funds from the buyer, the requirements that will create a termination of escrow without a closing (the wrong lapse of time or a breach of contract in another manner), the way the funds will be disbursed, the instructions with regard to taxes and insurance, and the instructions with regard to the payments of charges or liens against the property and distribution of the sale proceeds.

Can I Choose the Escrow Holder?

All parties involved typically choose the escrow holder. If a real estate agent, agency, or broker is involved, he or she may recommend an escrow holder that they have an established relationship with. You, and the other parties, though, have a right to choose a different escrow holder who is both competent and experienced. Many laws prohibit things like referral fees for services of this type, which means that you will get the best escrow service, no matter who the recommendation comes from.

Practice Due Diligence

While your deal is in escrow, be sure to read all instructions, and ask the escrow officer to explain anything to you that you do not understand. Your escrow officer will not, however, be able to offer you any legal advice. So if you need advice, consult your Realtor or a lawyer.

Expediting the Escrow

You might also want to check with your escrow officer to see if there is anything you can do to expedite your closing. Responding quickly to all written material will help speed things up a bit. In addition, be sure to provide all of your required materials, funds, paperwork, and signatures, in a timely fashion. Procrastinating or providing the wrong material can stall your closing. Other Escrows Once you have purchased your home, your lender may set up an escrow account for you to prepay your taxes and insurance costs on a yearly basis. Most homeowners find this to be easier than paying these expenses all at once. The amount you pay into your escrow account will depend upon the time of year you close escrow on your home.

About the Author

Chris Parry is a successful freelance writer and journalist, and has provided features for many media outlets including About.com, InternetContent.Net, and eFilmCritic.com among others. His most recent features include contributions to Lake Arrowhead Real Estate , a user's guide to buying real estate in Lake Arrowhead that includes access to the Lake Arrowhead MLS .