You're preparing to buy a home, and your real estate agent mentions escrow. What the heck is escrow? I have to admit I had no idea what escrow was as my husband and I prepared to buy our first house. Thanks to my husband and lender, escrow started to make sense. Let's look at what escrow is and why you need it when buying a home.

What is "Escrow"?

When your real estate agent says you're "in escrow", you've made an offer on a home, and items like earnest money, property deed, and loan funds are being held in an escrow account. An escrow agent oversees the escrow account and is responsible for transferring the property and property documents. This neutral agent doesn't side with the buyer or seller and ensures all parties receive what they're owed.

Certain conditions must be met when in escrow, including receiving an appraisal on the property, title search, and financing approval. Once these conditions are met, the earnest money will likely be applied to the home's sales price or the down payment. 

Close Escrow

All conditions have been met when escrow is closed, including receiving your home loan and having the title legally passed to you. The escrow agent will disburse transaction funds to the appropriate parties, verify that all documents are signed, and prepare a new deed naming you as the homeowner. The escrow agent will send the deed to the county recorder for recording. Once all of these steps are completed, escrow will close, and both the buyer and seller will receive a final closing statement and other documents. You must read the statement carefully and immediately report any errors to the closing agent. Put your statement in a safe place because you'll need it when filing your next income tax return.

Escrow Payments

Once you own the property, you will be responsible for paying state and local property taxes and maintaining insurance on the property. Typically, at least 2 months' worth of property tax and insurance funds are required by your lender before closing. You will make payments to your escrow or impound account to pay for these expenses. This account ensures that funds for insurance and taxes are available and paid on schedule. The lender who provided your home loan doesn't want you to miss these payments as it could result in foreclosure of your home.  

Monthly escrow payments are based on estimated annual property taxes and insurance, which may vary over the life of the loan.  

Your monthly escrow payment, along with principal and interest on your home loan, will be collected by your mortgage lender and then paid on your behalf. If there are ever insufficient funds in your impound account, your monthly mortgage payment may increase.

Conclusion

When buying a home, it's essential to understand what escrow is. An escrow account will keep your earnest money safe, transfer the property into your name, and ensure you're paying for state and local property taxes and maintaining insurance on your property. Now when your real estate agent mentions that you're "in escrow", you can feel confident knowing what it means and that you're in good hands.