To protect both the buyer and the seller in the sale of real estate, you’ll need to open an escrow account, sometimes referred to as simply “opening escrow.” But what is escrow? What is its function, and why is it necessary? Here is what you need to know.
What Is Escrow?
After an offer to buy a property is accepted, an escrow account will need to be opened. Escrow is a legal process that involves using a third party to hold and manage funds and documents during a real estate purchase. A third party is used to protect both the buyer and the seller until the sale of the property is complete. This account will hold any good faith deposit (also known as earnest money) the buyer puts down. The escrow account may also hold other funds, such as a down payment, seller credits, or closing costs.
Protecting the Buyer and Seller
The funds in the escrow account will stay there until the sale is complete. If for some reason the buyer backs out of the agreement to purchase the home, the seller typically gets to keep the deposit that is in the escrow account. Escrow accounts also protect the buyer if the seller does not fulfill their obligations under the terms of the purchase contract. When the seller does not hold up their end of the contract, the money will be returned to the buyer.
Who Manages an Escrow Account?
The party responsible for managing the escrow account may be a bank, title company, escrow company, or in some states, a law firm or attorney. They are responsible for making the funds available to the appropriate parties at the appropriate time during a real estate transaction. The fees charged by the party managing escrow are generally split between the buyer and the seller. Escrow is considered closed when all materials and funds have been distributed. This may happen the day the sale closes, a few days after your closing, or it may happen before you exchange the title. In some cases, funds may be held in what is known as escrow holdback.
What Is Escrow Holdback?
If, during the purchase, something causes a delay in your closing, the funds may be held in escrow. This is called escrow holdback. Delays may be caused by newly discovered problems with the home found during an inspection. In this case, additional money will be collected at closing and refunded after repairs are complete. An appraisal on a home that was not expected can also delay closing. In some cases, financing may fall through, requiring additional time for the buyer to secure new financing. Escrow holdbacks can offer a solution to delays in financing.
What Is a Mortgage Escrow Account?
A second escrow account may be opened after the sale of the home is complete. This account is known as a mortgage escrow account. This account will receive your initial payments for property taxes and homeowners insurance. It may require several funds worth of funds to be deposited into it.
Talk with an Experienced Mortgage Advisor in Oregon
If you’re planning to buy a home, it is smart to get your financing in order before you find the home you want to buy. In a competitive market, you’ll have an advantage if you’ve been pre-approved for financing. The experienced mortgage advisers at Strategic Mortgage Solutions will walk you through each step of the home-buying process, answering all your questions and keeping you informed of your financing every step of the way.
To speak with an experienced mortgage advisor today, send us a message or call 541-275-1148.