If you’re in the market to buy or sell, you’ve probably heard the term ‘escrow’ once or twice.

So, what is escrow, and how does it work? Read further to learn more!

What is escrow?

An escrow account is a secure place where earnest money deposits and contracts are kept in real estate transactions.

It’s a contractual agreement where a third party, usually an escrow agent, maintains money and documents until the deal is done and escrow is closed.

So, what is an earnest money deposit? Earnest money, also known as an escrow deposit, is a dollar amount buyers put into an escrow account after a seller accepts their offer.

The escrow company will then hold these funds in the escrow account for the transaction duration.

Think of it as a “good-faith” deposit. It compensates the seller if the buyer breaches the contract and drops out of it.

If you’re obtaining a mortgage on a home, this escrow account will continue to be used to hold onto excess funds from a mortgage payment to pay property taxes and insurance.

How does it work?

An escrow agent is typically a third-party agent. Usually someone from a real estate closing company, an attorney, or a title company agent.

This third-party agent is there to hold assets safely in an escrow account and ensure the transfers of funds and documents run smoothly.

With this, some contingencies might be part of the process. These include home inspections, repairs, mortgage approval, and other tasks contingent on completion.

Each time a step is completed, the buyer or seller signs a contingency release form, and the transaction moves to the next step.

The escrow agent will ensure that all proper documentation is filed throughout the transaction duration.

Once all conditions are met, then the transaction is finalized. The closing costs will be paid in full, and the money due to the sellers will be disbursed from the lender.

The escrow agent will then clear the title, which means the buyer will officially own the home.

How does it protect you?

Escrow may seem like a thorn in your side, but it can work in your favor.

Escrow protects all parties in a real estate transaction. This includes the seller, buyer, and lender.

For example, if a buyer has a home inspection contingency and discovers that the roof needs repairs, and the seller agrees to repair it, the seller won’t see a dime of the buyer’s money until the roof is fixed.

Sellers can benefit from escrow, too. If the buyers get cold feet at the last minute and bail on the transaction, the seller will get to keep the earnest money deposit.

This earnest money deposit typically equals 1% to 2% of the home’s purchase price.

When buyers back out for no legitimate reason, they forfeit this deposit to the seller.

Escrow is intended to keep both parties safe in all real estate transactions. Isn’t it nice to know that escrow will be there to cushion the fall if something goes wrong?