What Happens When You Go Into Escrow?

When it comes to buying a home, some of the terms and steps within the process can be a little confusing. Case and point — escrow.

Let’s jump in and break down exactly what “escrow” means and how it applies to you during the home buying process.

Going Into Escrow

The definition of an escrow is that it’s a financial arrangement whereby a third party holds funds in safekeeping pending the completion of a contract or other obligation.

Typically a homebuyer will enter into escrow after agreeing with the seller on a final price for the home they are purchasing. Both the seller and homebuyer will sign an agreement that declares the agreed upon price and then, that agreement will be given to the Escrow Officer or the escrow company.

The escrow company is responsible to for keeping the earnest money, or the “good faith deposit” of the homebuyer, and the money from the lender safe throughout the process until the transaction is completed during closing. As part of the closing process, the escrow officer will handle transfer of the property and the release the funds being held to complete the process.

What’s the Point of Escrow?

The short answer for why escrow takes place as part of the home buying/selling process is that it creates a way to keep the monies involved in the real estate transaction safe. As a neutral third-party to the transaction, the money will remain safe and secure until it is needed.

With the exception of the earnest money, the buyer won’t put down any additional money at the start of escrow. The money received is typically deposited by the escrow company into a trust until it is needed.

During escrow, things can pop up that might impact the transaction such as the buyer’s loan financing might fall through or the two parties might not be able to resolve a disagreement during the home inspection process.

Essentially, escrow let’s both the seller and the buyer know, without worry, that the money to complete the transaction is available and will be ready once the process is completed or the transaction is terminated (due to issues that cannot be resolved). It protects both parties while giving them both peace of mind.

Steps of Escrow Process

You should check with your realtor to be sure as the actual steps can vary by state, but the escrow process generally follows the steps below:

  1. Mutual Acceptance – the buyer and seller agree on the price and sign the initial contract
  2. Contracts Sent– both the buyer and seller send copies of the signed contracts over to the escrow officer who will compare them and ensure they match
  3. Escrow Opened – during this phase there are three things that will occur:
    • the escrow and title are opened
    • the escrow officer will request the seller’s mortgage payoff information and verify that there are no outstanding HOA dues
    • the escrow officer will reach out to the buyer’s lender and loop them into the process
  4. Identity Verification – the escrow officer will request affidavits to confirm the identities of the buyers and sellers
  5. 30-Day Wait – during this phase, the escrow company waits while the house goes through the inspection and appraisal process and the lender works through the underwriting process
  6. Closing Preparation – the escrow company will prepare the necessary closing documents and schedule the appointments for closing
  7. Closing – both the buyers and sellers will sign the required paperwork to make the deal official and then the escrow company will send the documents to be recorded with the county

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