Escrow isn’t a word that comes up much in casual chats, but if you’re having serious discussions about a home purchase, then it should definitely be part of the conversation. What is escrow on a house?
What Is Escrow on a House?
As The Balance explains, the concept of escrow isn’t limited to real estate. It’s actually a useful idea that pops up whenever two parties want to make an exchange of valuable items. What is escrow? Basically, two parties who want to make an exchange hire a neutral third party to control the payments between them and only release the money and goods as the terms of their contract are met. Understanding exactly how that works in a real estate transaction can help you prepare for your role as a homebuyer.
The Function of Escrow
What is the purpose of escrow? Why would people bother with bringing in a third party? According to Realtor.com, it’s a safety feature. Having an impartial third party mediate the deal and verify that the respective parties are fulfilling their contractual responsibilities before they receive any goods or monies helps to safeguard the interests of those involved in the deal.
Escrow in Real Estate Transactions
What is escrow on a house? As Zillow points out, escrow can be used in real estate transactions several different ways:
- Earnest Money: Escrow generally begins when your offer is accepted. If that offer includes any earnest money, it won’t go directly to the seller. Instead, it will go into an escrow account and be held until the terms are met for its release. How does this protect you? It prevents the seller from holding your money hostage as a negotiating ploy or walking away from the deal and keeping your money. How does it protect the seller? Generally, buyers who walk away without reasonable cause from a deal forfeit their earnest money. Having it in the hands of a neutral third party increases the likelihood the seller will actually get the money if the buyer walks away.
- Closing: A real estate transaction requires the services of a variety of professionals, and many of them are paid at closing by either the buyer or seller. The person charged with overseeing the escrow will ensure that everything is paid for and that all funds are transferred and all the documentation is properly filed before they sign off on closing the escrow account.
- Hold-Backs of Funds: Occasionally, the sale may be completed and ownership transferred while funds remain in escrow. This could occur if there is still repair work to be completed on the home or you’ve agreed to let the seller rent back the home for a period of time. In these situations, real estate professionals often advise buyers to request a hold-back of funds. Basically, a portion of the seller’s proceeds is held back until after the repair work is done or they’ve left the house. Then, you can confirm that the house’s condition is a match for what you were promised. If it is, the funds are released. If there’s a problem, the funds can be used to correct the issue.
The Cost of Escrow
As ValuePenguin reports, escrow services typically cost around one to two percent of the property’s final price. When you consider national median home values, you can expect escrow services to add roughly $2,000 to $4,000 to your closing costs. Who pays for escrow services? In some markets, the buyer and seller traditionally split the tab. In others, it’s usually the buyer or the seller that foot this particular bill. However, the payment of this fee is negotiable, so you can talk it over with the seller to decide who will be responsible for the charge.
Escrow on a Mortgage
It’s worth noting that you’ll likely encounter escrow again after your home purchase is finalized. As NerdWallet indicates, mortgage servicers often use an escrow account to hold funds for your property taxes and homeowners insurance. They typically collect funds for these bills each month as part of your mortgage payment and hold them in the escrow account until the bills come due.
Do you have additional questions about escrow? Whether you’re a first-time buyer or an old hand at the housing market, PrimeLending Kansas City is ready to help you achieve your homeownership goals. Contact us today to get started.