This article goes over a part of the home buying/selling process of “closing escrow”, which can be a part of the process that confuses a good share of first time home buyers and sellers.

The buying or selling of a home is usually never a simple or uninvolved task that many first-time home buyers and sellers seem to be unprepared for. However, with due diligence and proper research, any potential buyer or seller will have a much more successful and convenient time of selling or buying a property. The following article specifically handles a portion of the process that can confuse or intimidate first-time home buyers/sellers–closing escrow.

Defining Escrow: 

Before we start into the details of this process, a good place to start is by defining what exactly escrow is: it is defined as a legal arrangement in which a third party holds money or property until a particular condition has been met and a transfer of ownership can be made. This condition is usually the purchase agreement being fulfilled. 

An escrow agreement contains the conditions and terms between the two parties of a financial transaction and also includes the responsibilities of each party. Items and assets placed in an escrow agreement are managed by a trustee known as an escrow agent, this agent is usually a lawyer. This escrow agent holds assets in escrow until the contractual obligations have been met. Some of these conditions include: 

• Appraisal: This must be conducted before the sale of a home can occur because issues can arise if the agreed-upon purchase price is higher than the appraised value of the home. This is because that a bank will not lend more money than the appraised value. The buyer can try to use personal income to make up the difference or ask the seller to lower the price. However, if a buyer cannot make up the difference while the property is in escrow, the deal may be terminated. 

• Home Inspection: A buyer may agree to a condition that a home undergoes and pass a home inspection before purchase. This property would be held until that condition was met. As a seller, you want this home inspection to go as smoothly as possible, so be sure to do some research on how to optimize this part of the process!  

• Financing and Insurance: Another condition that can be attached to an escrow agreement is that the buyer must be able to secure financing or a mortgage for the property. 

• Title Search: Before the purchase of a home, a title search happens which is the process of checking public records for the ownership of the property. This search helps determine if there are any liens or any other claims attached to the property. 

• Zoning: A buyer may want to purchase a property for reasons that are outside zoning regulations. The seller may require a buyer to reveal the intended purposes for the property while in escrow.

• Repairs: The agreement may also require the seller to make necessary repairs to a property before the sale of the property. These repairs can vary from serious repairs to the removal of landscaping features like trees.

The process of purchasing a home can be a stressful one for both sides of the transaction and the already involved and stressful process could be even more stressful without an escrow agreement in place. The greatest asset of having an escrow agreement is the protection that is brought to the buyer, seller, and lender. 

Benefits of an Escrow Agreement:

• Home Buyer: The escrow account is a key protector of the buyer’s deposit during a sale. For instance, if a home sale ended up being voided due to a failed home inspection or another condition not being met, you are guaranteed to get your deposit back whereas if you handed the deposit directly to the seller, there would be a chance that the buyer wouldn’t get that money back. 

• Home Seller: The first benefit to an escrow agreement is that it can take the pressure off the seller to come up with a lump sum to cover the taxes and insurance. Additionally, the agreement also acts as a protection from the buyer violating conditions set down by the seller. 

Disadvantages of an Escrow Agreement:

As with most things in life, anything that has benefits usually has disadvantages attached to it. This is no different than having an escrow agreement. Here are some of the disadvantages:

• Higher Monthly Mortgage Payments:  The escrow agreement will be funded through your monthly mortgage payments so the added protection of the escrow agreement account will result in higher monthly payments on your mortgage. 

• Incorrect Estimates: The amount needed for the escrow agreement is determined by your property taxes and the home insurance costs. 

• Changes To Your Monthly Payments: Escrow is reassessed each year and depending on if you were short or had excess money, your servicer will come up with a new estimate for the year. If you were short, the monthly mortgage rates will go up. 

This is only a brief overview of the process and how an escrow agreement affects both sides of the transaction so be sure to do proper research and as stated regularly, do not be afraid to reach out to your local real estate agency to receive guidance and information on this important process!