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Escrow: What is this All About

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By : Vicki Hat    99 or more times read
Escrow is a common term in the arena of real estate. You will most likely encounter this every time you buy a house. Parties involved in home buying would normally close or terminate the transaction through escrow.

Escrow is simply an account where the funds are deposited before disbursement to the right parties takes place. Documents or instruments that are required for the transfer of title and finalizing the mortgage are also submitted to a neutral third party who is called the escrow agent. You will also encounter escrow through your lenders. They would want you to set up a trust account of some sort so that you can deposit the payment for your insurance and taxes which is equivalent to yearly amounts.

RESPA or Real Estate Procedures Act regulates the establishment of escrow accounts. An escrow account may be required by lenders but borrowers may have the option not to maintain the account. However, some government funded loans requires borrowers to maintain this account; as such is part of the agreement for them to insure their loans.

How closing in Escrow works

When parties to home buying close through escrow, an escrow holder or agent is assigned to facilitate the closing process. This person is a neutral party who would assure that all fees will paid and all documents are submitted before the sale is finalized.

Take note: you can clarify with the closing agent what needs to be done to close the home buying transaction properly but they are not reliable sources of info when it comes to legal risks involved in the transaction.

The escrow holder will not release any fees, unless the escrow instructions are fulfilled. The escrow instructions are written by the seller, lenders and buyers. No disbursements will take place unless each party fulfills what is asked of them and unless all conditions are met.

As a summary, here are the contents of the escrow instructions:

  • the appointed escrow holder or agent
  • the beginning and ending dates of escrow
  • the amount of money expected to be received in the escrow account
  • the list of documents that must be collected
  • The various conditions that must be satisfied
  • Authorization of the escrow holder to perform the various roles expected of him or her.
  • Schedule of tax and insurance
  • Liens or encumbrances that must be settled

The escrow holder can be anyone just as long as the parties all agree to his or her appointment. But according to some sources, if there is a broker involved, he or she may be the one who would recommend the agent. What is important is that the person hired to perform this role should be someone who is competent enough to handle matters like this.

People obtain escrow because it is the best way to secure the interests of the parties. This system is even used when shopping online like in E-bay. Aside from security, the use of escrow makes it more convenient for the buyers as all they have to do is to deposit their funds and the disbursement would be done by the escrow agent.
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