What is Escrow & How Does It Work?

Posted by Alex Lewis on Monday, May 7th, 2018 at 1:28pm.

The process of buying your first home brings with it a handful of new terms and phrases to learn.

By researching or asking your Austin or San Antonio real estate agent what each new term means, you can set yourself up for success and achieve a more informed understanding of the home buying and selling process.

Among the many words you may soon encounter, “escrow” is one you’ll want to know. While the term is used across a handful of financial industries, this article will solely define escrow in relation to the real estate industry.

What Does Escrow Mean?

When a person refers to money (or something else of high value) as being “in escrow”, they mean that their value-item is being held by an unbiased third party to ensure a fair transaction during a large purchase.

The escrow process exists to add financial security to a large purchase so that a buyer and seller can each feel safe when moving forward with their transaction.

How Does Escrow Benefit Homebuyers and Sellers?

While obvious, it’s worth remembering that buying a home means spending a lot of money. Likewise, selling a home means signing away a high-value asset.

When people deal with such large quantities of money or such high-value personal assets, both parties want some protection.

Of course, you wouldn’t imagine someone showing up with a briefcase with hundreds of thousands of dollars to buy a home. In the same way, simply carrying a check for the value of a house seems almost equally risky.

From the perspective of the home seller, signing away their home without immediately having money put in their hand can feel terrifying.

Both parties know that without a fair transaction process, someone could easily be burnt on the deal. That’s where the escrow process comes in.

Putting money in escrow is the process of entrusting a third party with the responsibility of delivering agreed-upon valuables to the appropriate parties after a contract has been fulfilled. When money is in escrow, the seller knows that they are safe to sell their home because the money is in a third party account, ready to be delivered to their own.

From the perspective of the homebuyer, they can rest assured that the homeseller won’t suddenly try to cheat them for more money at the last minute before the transaction.

Having one’s money in escrow makes large transactions safer for both parties.

How Does the Escrow Process Work?

We used Investopedia to help breakdown some of the escrow process. Here’s what you should expect as you prepare to buy a home:

Opening an Escrow

The escrow process begins with a signed purchase agreement by the home seller and buyer. This purchase agreement is not the deed itself, but is a contract that communicates the expectations of the future purchase to both parties, as well as the escrow account provider.

Next, the third party holder (also known as an escrow agent) collects the necessary funds from the buying party. That money is deposited into an escrow account, where it will remain until the deed has been signed.

At this point, several actions are put into motion. The bank offering a homebuyer their mortgage will appraise the property, a variety of home inspections will be performed, title and hazard insurances will be obtained by the future homeowner, and final walk throughs will be made, among other actions.

And finally, the homebuyer and seller will be respectively delivered what is called an HUD-1. This is the official, final document with the total cost of the purchase, including all taxes, closing costs, and more.

Buyer tip: Just because the HUD-1 form is a final document doesn’t mean it is necessarily without error. Double check everything before signing.

Closing an Escrow

The closing process requires reading and signing a lot of paperwork for both the seller and buyer. This paperwork helps to confirm that the transaction happened legally as well as according to the initial purchase agreement.

When all is said and done, closing the escrow means that the previously held money is delivered to the bank account of the homeseller and that the homebuyer has received the deed and keys to their new home.

With so much money at stake, the escrow process can involve a lot of paperwork. But don’t worry. While being aware of the escrow process is important, it’s worth remembering that the escrow agent is trained to walk homebuyers safely through the process so that their money is handled safely and no important legal details are missed along the way.

Are you in the process of buying a Central Texas property? Let a JB Goodwin agent help you find the right home. With agents in Austin, San Antonio, and other cities throughout Central Texas, we’re excited to connect you to the property and price you’re looking for.

Share this Article with a Friend

Leave a Comment

Format example: you@domain.com
Format example: yourwebsitename.com

Subscribe for Listing Updates Now