How Does Escrow Work?

How Does Escrow Work?

When Do Home Buyers Need Escrow Accounts?Before buying a home, people usually have to put some money into an escrow account. Understanding what an escrow account does helps buyers to know why they might need one.

What Does It Mean When a Home Is in Escrow?

After a home buyer expresses intent to purchase a home, they typically have their real estate agent put together a purchase offer to present to the seller. If the seller accepts the offer and both parties sign a purchase contract, the buyer will usually provide a deposit of earnest money to indicate that they are personally committed to the transaction.

This money will go into an escrow account, which is not held by the seller or immediately accessible to them. Even though the account is in the home buyer's name, they also cannot retrieve the money from the escrow account without meeting certain conditions. This ensures that the strongest link in the sales chain–money–remains present but impossible to manipulate by either side.

Why Is Escrow Useful for Home Buyers?

Buying property involves the transfer of tens or hundreds of thousands of dollars, in most cases. Any single person or family that is moving around thousands of dollars of their own liquid assets during the purchase of a home needs to feel secure that the place where they put the money will be safe until the transaction is complete. Without an escrow account, buyers would have to find other ways to show sellers that they have the money necessary, and would not spend it on other things.

The escrow account also protects the home buyer in case some aspect of the contract, such as a low home appraisal, makes the purchase impossible. If a home buying contingency cannot be met, the escrow account allows the buyer to retrieve their earnest money to use in buying another home, without having to get the money back from the seller.

Who Holds Escrow Money?

People who want to buy a home and put down a decent amount of earnest money need to be sure that the designated party holding the money will be responsible with it. For this reason, the organization that holds the escrow account, typically referred to as an “escrow agent,” must be qualified and experienced in the handling of escrow money.

Escrow agents could be a local credit union or a bank, or another entity that has practical experience in real estate transactions. The escrow agent is responsible for making deposits or withdrawals from the account according to the specifications of the purchase contract.

Can Home Buyers Avoid Escrow?

For many reasons, using escrow during the buying process is something that buyers may not be able to avoid most of the time. However, escrow accounts are often kept open for buyers to deposit money each month to cover the cost of property taxes or insurance. In this case, the escrow account ensures that there is enough money available to pay taxes and premiums each year.

Home buyers who would prefer to save this money themselves can ask their lenders to allow them to avoid using escrow. Since unpaid property taxes could create a lien that affects a lender's interest in the mortgage, lenders may decline this request, or set a higher interest rate for buyers who want to pay their own property taxes.

Putting money into escrow may seem like a hassle for home buyers, but it fulfills a vital function to the buying process, whether purchasing a home in Eden Prairie or elsewhere. With wise use of escrow accounts, buyers can protect their liquid assets as they prepare to buy a home.

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