Understanding the home buying process can feel a bit like learning a different language. From debt-to-income ratios, to inspection contingencies, to escrow, each step of the process has its own vocabulary to learn.
Once you get to the closing table you’ll start to hear a lot of talk about escrow. But what exactly does escrow mean when it comes to buying a home?
Escrow for Home Buying: The Basics
Escrow is a legal arrangement in which a third party (an escrow agent or the title company) holds a large sum of money, in this case, the buyer's earnest money, until specified conditions are met.
Escrow primarily exists as a way to impartially hold your good faith money and to ensure both parties receive what they are entitled to should the deal fall through.
In most cases, it is the buyer’s responsibility to pick the escrow agent. “A buyer should never give their earnest money directly to the seller,” Megan Ryan of the Zimmerman Group cautions buyers. “Ask your real estate agent for a reputable escrow company in your area.”
Escrow Agents Do More Than Just Hold Your Earnest Money
In addition to ensuring your earnest money exchanges hands according to the conditions of your contract, the escrow agent may perform a variety of other tasks including:
- A title search.
- Requesting documents to confirm the property’s legal owner.
- Supervision of the deed signing process.
- Forwarding payment to the lender.
“You need to have a solid understanding of what your contract describes as the duties of the escrow agent,” said Kelly Boenzi of the Zimmerman Group. “If there are disagreements about the release of the escrow the escrow agent is responsible for determining how these funds are released.”
In most instances, your earnest money will move seamlessly from the escrow account to the seller after the contractual contingencies are met. Nevertheless, it’s important to consult with your REALTOR® to find a reliable agent near you.