Real Estate Made Easy: What is Escrow?

March 23, 2020

The process of buying a home is chock full of terms, contracts, and frankly, confusion. If you’ve decided to embark on the journey of owning property, it’s important to break these terms and processes down in order to make more informed decisions on what might be the largest purchase of your lifetime.

Today, we’re breaking down escrow to help you on your homeownership journey.

What is escrow?

Escrow, as defined by Investopedia, is the use of a third party to hold an asset or funds before they are transferred from one party to another. To be “in escrow” is the part of your purchase where all parties are in the process of completing a transaction but waiting for everyone to be sure the transaction will be carried out. For example, if there are any residual uncertainties over a party completing their end of the transaction or agreement, escrow can help protect funds.

While escrow can be utilized in any context where parties are about to complete a transaction, the most familiar iteration of escrow involves real estate. However, escrow can be applied to legal transactions, intellectual property, mergers and acquisitions, and more.

Generally speaking, the point of escrow is to help hold parties accountable and keep their money safe in the process of putting the finishing touches on their agreement. In addition to accountability, it helps assure both parties that no untrustworthy transactions are taking place while business is conducted.

So, how does escrow work for homeownership?

When both parties are ready to proceed with their purchasing agreement, a third party is elected to hold the money in question until the agreement is carried out. Let’s think about the application of escrow in terms of real estate. When a buyer and home seller reach an agreement, the buyer will most likely make an earnest money deposit/complete their transaction with their seller by giving money to a third party.

Completing this action does two things: first, it shows the seller that their potential buyer is serious about making this purchase and second, illustrates to the seller that the purchaser isn’t just interested but can fulfill the necessary payment to purchase the property in question. The amount of money in question is determined by the parties involved—and in some cases, the state law of the buyer and seller.

As a buyer, your earnest money deposit will be held by a reputable third party (not the seller) in an account. This money is now in escrow and the protection of your reputable third party until the transaction is completed.

In some cases, if the transaction is not completed or parties change their mind, the funds are then dispersed. Dispersal could look different depending on your state’s laws and your personal situation, so you’ll want to make sure you’re in the know about the terms of your financial escrow.

As mentioned previously, homeownership can be a long and involving process. As you embark on this journey, you’ll want to be sure you stay aware of every part of the process so you can make decisions that best fit your individual situation.

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