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What are these “escrows” you keep referring to and where did my money go?

August 3, 2015

 Whether you are watching HGTV, talking to your neighborhood Realtor at a dinner party or trying to buy a piece of real estate, you have undoubtedly heard the term “escrow” thrown around. People talking about opening it, closing it, being in it and accounts being held for it. If it seems like this “escrow” can refer to many different things, that’s because it can and it does.

Merriam-Webster defines escrow as:  “a deed, a bond, money, or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition”. In real estate escrow typically refers to three different phases or parts of a transaction. 

Chronologically, the first time the term escrow comes into play is when an offer is made on a property. The contract’s performance is guaranteed by an “earnest money deposit” placed by the buyer in exchange for the seller removing the property from active sale and reserving it for the buyer until the buyer can fund the purchase by cash, 1031 exchange, or a mortgage loan. If the buyer changes their mind and decides not to fulfill the purchase agreement, the seller retains the earnest money deposit. This money is held by an uninterested third party until the sale is consummated or cancelled. The placement of this money with a third party agent is what is referred to by “opening escrow” or placing an “escrow deposit”. 

Being “in escrow” refers to the time between when the contract was initiated and the time the sale closes. During this time the buyer procures their inspections, typically an appraisal and survey are conducted and any conditions of the sale are completed. This escrow is terminated when the sale goes to closing and all of the financial processes are settled. The earnest money deposit is credited toward any closing costs or down payments that the buyer owes. The phrase “escrow fell through” refers to when a term of the contract cannot be met and the contract is cancelled.

The final term used in reference to escrow are the buyer’s “escrow accounts”. This refers to the common practice of mortgage lenders to require a prorated amount of money each month be added to the buyer’s principle and interest payment to pay the homeowner’s insurance premium and yearly property taxes. The lender collects approximately 1/12th of the yearly insurance and tax amount each month and holds it in an account specifically for the borrower. When the insurance premium and tax payments are due, the lender pays them with funds from the borrower’s “escrow account”. By doing so they protect their investment. 

Hopefully the next time you hear the term escrow you will be able to better understand the part of the transaction the person is referring to! If you would like more information on escrow or any professional advice on buying or selling real estate anywhere in the country, please call me at (850) 496-2051 or email your questions to DawnJohnsonRealtor@gmail.com. Check out my business page on Facebook- Back Stage Realty– and post an idea for an article to get a special little shout out from me to you!

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