According to Merriam-Webster, the first use of the word escrow can be traced back to 1594, so clearly, it’s been around for quite a while. Despite its longevity, escrow isn’t exactly something the average person uses in their daily lives. How does escrow work when selling a home? If you’re pondering that question, you’re not alone.
What Is Escrow?
As Zillow explains, escrow is when a neutral third party is holding something valuable during a transaction. For homeowners, there are a couple of different times when you may have need of an escrow account:
- When You’re Paying Property Taxes and Insurance: Lenders have a vested interest in seeing that your property taxes and homeowners insurance get paid. That’s why many lenders will collect the money for these payments as part of your monthly mortgage payments. Then, they’ll place the funds in an escrow account until the bills come due.
- When You’re Selling a Home: Home purchases are complex transactions that take time. During that period, the funds related to the transaction are placed in an escrow account for safekeeping. The exact mix depends on the circumstances. Common deposits include your buyer’s earnest money, loan fees, real estate fees, third party payments, and your profits as the seller.
How Does Escrow Work When Selling a Home?
How does escrow work when selling a home? If you’re a seller, understanding this is essential. After all, you need to know what your responsibilities are. When are you in escrow? What should you do while you’re in escrow?
Escrow isn’t just a type of account. It’s also used to describe the period of time when your home sale is in need of an escrow account. As Nolo reports, you’re in escrow when you and the buyer have signed the purchase agreement and agreed on an escrow or title agent to act as an intermediary. Escrow ends when all the funds are disbursed at closing.
A Seller’s Responsibilities
When it comes to responsibilities during escrow, the buyer’s list is much longer than the seller’s. However, you do have a few things that you’ll need to accomplish. HomeLight offers a to-do list for sellers:
- Complete the property disclosures. If you haven’t already done so, complete any required property disclosures. Be honest, but don’t go looking for problems.
- Prep for the appraisal. Appraisers often need to visit the home to complete their task, so watch for any attempts to schedule an appointment, and respond promptly. Prepare your home like you’re getting ready for a showing. Write up the details of any major renovations or repairs.
- Make your home available for inspections. Inspectors generally prefer to work when the owner isn’t home, so communicate when the home will be available to your agent. Keep the home clean, limit clutter, and leave keys and remotes to areas the inspector might need to access in plain sight.
- Be responsive to questions during the title search. The buyer’s lender will require a title search to verify that you’re the true owner of the home and that you have the right to sell it. This also ensures the details of the home are recorded properly and that there are no outstanding liens against it. If questions arise, you may need to provide documentation to settle the matter and prevent delays.
- Pay off your mortgage. If you still owe on your mortgage, you’ll need to pay it off when you sell your home. Your escrow officer will order a payoff statement to determine how much is still owed.
Your Mortgage Escrow Account
What about the escrow account that your lender used to set aside part of your monthly mortgage payment in order to pay your property taxes and homeowners insurance? What happens to that escrow account after you sell the home? Property taxes are divvied up during closing. After that, they’re the new owner’s responsibility. According to PocketSense, if there’s money sitting in your old mortgage escrow account after closing, it’s returned to the seller.