What is an Escrow?

What Exactly Is An Escrow?

An escrow occurs when a neutral third party holds the documents and monies involved in a real estate transaction and ensures that all conditions of the transaction are met. Escrow also refers to a special account that a lender establishes to hold monthly installments from the borrower to cover property taxes and insurance.

Why is it needed?

People buying and selling real estate often open an escrow for their protection and convenience. The buyer can instruct the escrow holder to disburse the purchase price only upon the satisfaction of certain prerequisites and conditions. The seller can instruct the escrow holder to retain possession of the deed to the buyer until the seller's requirements, including receipt of the purchase price, are met. Both rely on the escrow holder to carry out faithfully their mutually consistent instructions relating to the transaction and to advise them if any of their instructions are not mutually consistent or cannot be carried out. An escrow is convenient for the buyer and seller because both can move forward separately but simultaneously in providing inspections, reports, loan commitments and funds, deeds, and many other items, using the escrow holder as the central depositing point. If the instructions from all parties to an escrow are clearly drafted, fully detailed and mutually consistent, the escrow holder can take many actions on their behalf without further consultation. This saves much time and facilitates the closing of the transaction.

Who May Hold Escrows

The escrow holder may be any disinterested third party (although some states require that certain escrow holders be licensed).

There are two important reasons for selecting an established, independent escrow firm, an attorney, or an escrow officer with a bank, S&L or title insurance company. One is that real estate transactions require a tremendous amount of technical experience and knowledge to proceed smoothly. The other is that the escrow holder will generally be responsible for safeguarding and properly distributing the purchase price.

Escrow officers with established firms generally are experienced and trained in real estate procedures, title insurance, taxes, deeds and insurance.

What Does An Escrow Holder Do?

An escrow holder is a neutral third party who takes instructions based on the terms of the real estate transaction and, when necessary, the lender’s requirements.

What Are The Duties Of The Escrow Holder?

• Receiving and holding all monies, instructions, and documents pertaining to the real estate transaction.
• Serving as the communication link and liaison between all parties.
• Requesting a preliminary title search to determine the status of title to the property.
• Requesting a beneficiary statement or payoff demand from existing lenders.
• Holding inspection reports, deeds, and insurance documents.
• Complying with the lender’s requirements in its instructions to escrow.
• Preparing or obtaining the grant deed.
• Prorating taxes, interest, insurance, rents, and other costs related to the property.
• Recording the deed and other documents.
• Requesting the title insurance policy.
• Closing the escrow according to the instructions of the buyer, seller, and lender.
• Disbursing funds as authorized by the instructions, including charges for real estate commissions, loan payoffs, title insurance, taxes, recording fees, and other costs.
• Preparing final statements of disposition of all funds.

Key terms and phrases commonly associated with escrow include:

Escrow payment:
Funds that a mortgage servicer withdraws from a borrower's escrow account to pay property taxes and insurance.

Escrow analysis:

A lender's periodic examination of an escrow account to determine if the lender is withholding enough funds from a borrower's monthly mortgage payment to pay for expenses such as property taxes and insurance.

Back-to-back escrow:

Arrangements that an owner makes to oversee the sale of one property and the purchase of another at the same time.

Escrow closing:

An escrow closing occurs when all conditions of a real estate transaction are met and the title of the property is transferred to the buyer.

Escrow Company:

A firm that acts as a neutral third party to ensure that all conditions that the buyer, seller, and lender establish in a real estate transaction are met.

What are Escrow Instructions?

Escrow instructions are written documents, signed by the parties giving them, which direct the escrow officer in the specific steps to be completed so the escrow can be closed.

Typical instructions would include the following:

• The method by which the escrow holder is to receive and hold the purchase price to be paid by the buyer.
• The conditions under which a lapse of time or breach of purchase contract provision will terminate the escrow without a closing.
• The instruction and authorization to the escrow holder to disburse funds for recording fees, title insurance policy, real estate commissions and any other closing costs incurred through escrow.
• Instructions as to the proration of insurance and taxes.
• Instruction to the escrow holder on the payment of prior liens and charges against the property and distribution of the net sale proceeds.
• Since the escrow holder can only follow the instructions as stated, and may not exceed them, it is extremely important that the instructions be stated clearly and be complete in all details.