Escrow is an important term that you should know when you are buying or even selling a home. Escrow is something that affects both buyers and sellers. It’s a safe place for important documents and money to be stored until the transaction is settled.
You are probably familiar with the term escrow deposit or earnest deposit. This is the money that you pay upfront when you sign a purchase contract. It’s your money in ‘good faith’ to prove that you are serious about buying the home. So that the seller doesn’t take possession of the money prematurely, it usually sits in escrow, as do any other important documents pertaining to the home’s sale.
Let’s take a look at how escrow protects both the buyer and seller.
Who Holds the Escrow?
First, you should know that you’ll probably have an escrow officer in charge of your escrow account. This neutral third party helps keep the money safe. It is only upon satisfaction of certain conditions or situations that the escrow officer will let the money go to one side or the other. Escrow makes sure that everything that goes on in the transaction is fair to both sides.
How Escrow Protects Buyers
As a buyer, you need to be protected. In other words, you need to make sure that the transaction goes as it was described in the purchase contract. If there are items the seller agreed to leave or repairs the seller agreed to make, the buyer will verify these things during the final walkthrough. If the buyer finds that something isn’t as it was described in the purchase contract, the escrow agent will hold onto the escrow funds until the situation is resolved. This helps prevent the buyer from losing their earnest money or the money to buy the home when the seller doesn’t hold up his end of the bargain.
How Escrow Protects Sellers
Escrow protects sellers from buyers that aren’t serious about buying the home. Your earnest money sits in the escrow account. You may only have access to it if you have contingencies on the purchase contract that affect your ability to purchase the home. For example, if you have an inspection contingency on the contract and the inspection report comes back with serious issues with the home, you have the right to back out of the contract and get your earnest money back.
If you don’t have contingencies on the contract or they have all expired, the earnest money belongs to the seller if you back out of the transaction. This protects the seller from buyers that change their mind after signing the contract. A purchase contract is a legally binding document. If you agree to buy the home, you have to buy it unless you have a legal way out of the contract.
The bottom line is that escrow keeps everyone on the up and up. It makes sure that the seller doesn’t mess with the buyer and that the buyer doesn’t mess with the seller. It keeps everyone on an even keel and if there is an issue, it ensures that a proper resolution is created before any money exchanges hands.