Step 6: What Is Escrow?
What Is Escrow?
What is escrow and why is it so confusing!? This is an age old questions and I’m here to help you understand exactly what escrow is and why it’s a little difficult to understand.
First of all the actual definition of Escrow is “A bond, deed, or other document kept in the custody of a third party, taking effect only when a specified condition has been fulfilled.” True definition aside, I’m here to explain what escrow means specifically in Real Estate.
Now, why is it so confusing? Escrow itself can mean more than one thing in a real estate transaction. Escrow is usually referred to in three different forms when buying and selling real estate, let me break it down.
1.) Escrow Company / Escrow Officer: When you’re in contract to buy or sell property (in contract meaning, both parties have agreed on terms in a purchase agreement) it’s now time to start moving some money around. An escrow company or escrow officer is the third party that facilitates the transfer and holding of funds between the buyer and seller according to the terms of the contract. For example, when you give the seller your good-faith deposit you need a third party to hold it so it’s legally protected and it’s not transferred into any personal bank accounts until instructed in writing and all parties agree. That’s where the escrow company or escrow officer comes in, they hold and facilitate the movement of those funds.
2.) Number two: Escrow Account / Impound Account: When you get a loan, your lender will typically set up an Escrow Account or sometimes called an Impound Account. This account is used to pay your property taxes and insurance premiums on your new house. When you get a mortgage you’re usually paying something called PITI, Principal (the amount borrowed,) Interest, Taxes & Insurance. Instead of just writing your mortgage check every month to your principal and interest and then paying your taxes and insurance separately the escrow account adds the taxes and insurance to your monthly payment so your mortgage is now your PITI and it’s all paid together. This makes your bills a little easier to handle, less to think about.
3.) Number three: Escrow Timeline: This is what you hear your real estate agent referring to the most! When we tell our buyers “congratulations, you’re in escrow” what we really mean is, now we have a contractually agreed upon timeline to get stuff done. There are a lot of moving parts during the escrow period, inspections, appraisals, loan underwriting, negotiations to be handled etc.. so being “In Escrow” just means now we have to start moving to get stuff done so we can close the deal on the agreed upon timeline of that escrow period, typically 30 days.
I really hope you understand the process now. The concept of Escrow can seem a little ambiguous but I promise, once it clicks it clicks and when you have a full understanding of the process it can really work in your favor when playing in the real estate market. More knowledge, more leverage.