What is escrow?

Opening an escrow account

To deposit your earnest money, you’ll write a check and deliver it to your escrow agent, who works on behalf of an escrow company.

This agent will act on behalf of the interests of all parties involved in the deal. Serving as the go-between for the buyer and seller, the escrow company holds on to all the funds and the documents throughout the closing process until the sale has been closed.

Once the sale has been successfully completed, the escrow company will disburse the funds.

The escrow process ensures that the title to the property isn’t transferred until the funds have been exchanged.

The fee to cover escrow services is typically divided between both parties.

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How does the escrow process work?

Hazel puts her home up for sale and Alex makes an offer, which she happily accepts. Alex will give the escrow agent his initial payment while he waits for the home inspection and his financing to go through.

At closing, the escrow company will make sure the funds are passed from Alex’s mortgage lender to Hazel. At the same time, the company makes certain that the title for the home is passed from Hazel to Alex.

Title report and title insurance

Other than holding funds, one of the major purposes of an escrow service is ensuring the smooth transfer of a home’s ownership.

One factor that can prevent a smooth transfer is an issue with the property’s title.

Because of this, your lender will require that you have a title report done and that you take out title insurance.

The report will ensure that no liens or bankruptcies are associated with the property, because those would prevent the transfer of the home.

Referring back to our example above, if Hazel had taken out a loan that put her home up as collateral, and then failed to pay it back, a lien would be placed on her home. Until she clears that debt, the home is not technically hers to sell.

Title insurance protects both the buyer and lender from any legal challenges that may pop up that a title search didn’t initially uncover.

Issues with the title are known as clouds or defects, and they are the seller’s responsibility to resolve before the sale can go through. If the seller can’t or won’t take care of the issues, the buyer is entitled to walk away from the sale and seek return of the earnest money that was put down.