What Is Escrow and How Is It Used in Real Estate?

If you’re in the process of buying or selling a home, you may have heard the term “escrow” thrown around. But what exactly is escrow and how is it used in real estate? In this article, we’ll explain everything you need to know about escrow, including how it works, who is involved, and why it’s important.

What is Escrow?

Escrow is a legal process where a third party holds and regulates payment of funds required for two parties involved in a transaction. The funds are held by the escrow service until it receives the appropriate written or oral instructions or until obligations have been fulfilled. Funds can include money, securities, or other assets.

The escrow process is used in various situations, but it’s commonly used in real estate transactions. During a real estate transaction, escrow typically involves the buyer depositing money into an escrow account. This money is held in the account until the transaction is complete and the seller receives the funds.

How Does Escrow Work in Real Estate?

When you’re buying a home, the escrow process typically starts when you and the seller agree on a purchase price. At that point, you’ll give your earnest money deposit to the escrow company, which will hold it until the sale is complete. The earnest money deposit is typically around 1-2% of the purchase price and shows the seller that you’re serious about buying the property.

Once you and the seller have signed the purchase agreement, the escrow process begins in earnest. The escrow company will make sure that all of the necessary documents are in order, and that any inspections, repairs, or other contingencies are completed before the sale is finalized.

As the buyer, you’ll also need to secure financing for the home. The escrow company will work with your lender to ensure that all of the necessary funds are in place to close the sale. Once everything is in order, the escrow company will disburse the funds to the seller and any other parties involved in the transaction.

Who is Involved in the Escrow Process?

In a real estate transaction, there are several parties involved in the escrow process. These may include:

  • The buyer
  • The seller
  • The real estate agent or broker for the buyer and seller
  • The title company
  • The lender
  • The escrow officer or company

The escrow officer or company is typically responsible for managing the escrow process, including holding the funds in an escrow account and ensuring that all of the necessary paperwork and documents are in order.

Why is Escrow Important?

Escrow is an important part of the real estate transaction process because it helps protect both the buyer and seller. By using an escrow service, the buyer can be sure that their money is being held safely until the transaction is complete. And the seller can be sure that they will receive their funds once the sale is final.

Escrow also helps ensure that all of the necessary paperwork and documentation is in order before the sale is finalized. This can help prevent disputes or legal issues down the line.

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