What Is Escrow, and How Does It Work?
If you’re buying or selling a home in Missouri, you’ll come across several discussions of escrow payments. But what is escrow in real estate, exactly? And why is it such a critical part of the buying and selling experience?
In short, escrow is a neutral process for safeguarding money and items involved in typical real estate transactions. It provides a secure way to handle funds and documents during every stage, from initial offers to closing, and long afterward. Let’s explore what escrow looks like and how it benefits buyers, sellers, and lenders.
Start With Earnest Money: How Escrow Works Before Closing
One of the first ways escrow shows up in your transaction is when a buyer submits earnest money. This good-faith deposit demonstrates the buyer’s commitment to the contract and typically amounts to 1% to 3% of the purchase price.
Rather than going directly to the seller, a real estate agent places the earnest money into an escrow account. This secure account is usually managed by a real estate brokerage or title company and protects the money while the transaction moves forward.
If the buyer backs out for a valid reason, like a failed inspection, the funds are typically returned. If the parties have met all contract terms, the agent delivers the money to the closing agent, who applies it to the purchase price. The money then appears as a credit to the buyer on the settlement statement. If the buyer walks away without justification, the contract may allow the seller to receive and keep the deposit.
Closing Escrow Involves Safe Handling of Funds and Documents To Complete the Sale
After clearing contingencies and the scheduled closing day approaches, the transaction enters its most formal stage of escrow. At this point, a title company or real estate attorney takes over and uses a secure escrow account to manage all the funds involved in the real estate transaction.
The title company or attorney confirms that the title is clear and the loan conditions are complete.
Only after everything is in order and all of the necessary closing documents are officially signed, the escrow officer releases funds. They pay proceeds to the seller and other expenses detailed on the settlement statement, like real estate commissions, outstanding property taxes, appraisal fees, and the like.
The closing agent records the transfer and mortgage documents with the appropriate government office, and the transaction is officially complete.
What Happens After You Close? Escrow Doesn’t End There
After closing, another escrow process often continues, this time managed by the mortgage lender. If you’re financing the home, your monthly mortgage payments likely include additional amounts to cover 1/12 of your annual expenses for property taxes and homeowners’ insurance.
The mortgage company deposits these funds into an ongoing escrow account that it manages under supervision. They hold those funds until the property taxes and insurance are due on your home, at which time the lender pays those expenses directly to your city and county tax officers and your insurance company.
Federal regulations also require the lender to conduct an annual analysis to make sure that they are collecting the correct amounts from you as part of your monthly payment. If your tax bill or insurance premiums go up, your mortgage payment will go up to cover the difference. If the mortgage company collects too much money, it must credit or refund the overpayment.
You avoid large annual payments, and the mortgage company protects its interest in the property by ensuring the timely payment of property taxes and insurance premiums.
Why Escrow Is So Important in Real Estate
Escrow might seem like just another layer of paperwork, but it serves a vital purpose in understanding what to consider when selling or buying a house.
It’s also worth noting that Associated Real Estate Group only works with reputable escrow partners in mid-Missouri. Whether a title company or real estate attorney manages the account, you can trust that your money and documents are in safe hands.
Stay Informed and Ask Questions. Your REALTOR® Is Here To Help
Now that we’ve covered the basics of escrow in real estate, when you’re choosing a real estate agent in mid-Missouri to help guide you through your specific situation, count on Associated Real Estate Group..
All of our licensees are REALTORS® and proud members of the Jefferson City Area Board of REALTORS®, the Missouri Association of REALTORS®, and the National Association of REALTORS®.
Call us today at (573) 632-8500 to get started!