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What is Escrow?

By Arvin Sahakian · Dec 7, 2014 · Mortgage

What is Escrow?

Image courtesy of Pall Spera, Pall Spera

Escrow is a neutral third-party who safeguards your real estate and mortgage transaction. They ensure all parties are in agreement before releasing money and closing.

If you're like the millions of people who buy and sell real estate, get a new mortgage, or refinance an existing mortgage each year, you will rely on an escrow company who protects and facilitates the exchange of monies and documents between all parties involved.

What is Escrow?

Escrow provides what is known as a settlement service. They are a regulated neutral third-party who holds all monies involved in a transaction and releases money only when conditions within the contracts are performed and met by two or more parties involved in the deal. Escrow ensures all this happens at the same time. Until that point no party is fully committed.

Definition of Settlement Services as defined by law:

Settlement services include "any service provided in connection with a real estate settlement including, but not limited to, the following: title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate agent or broker, the origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of loans), and the handling of the processing, and closing of settlement." 12 USCS § 2602

In other words, escrow ensures all parties are in agreement before any deal closes.

What is an Escrow Account for Your Mortgage?

When getting a mortgage, you will notice that many lenders require an escrow account be set up to pay for property taxes and homeowners insurance. Because your home is the bank's collateral, the lender needs to protect your home from default due to missed property tax payments or catastrophic loss from lack of insurance coverage.

An escrow account simply holds your money and pays the tax collector and insurance company when payments are due.

BeSmartee TipTip: Given a choice many borrowers like using escrow as well! It helps spread your tax bills and insurance premiums over monthly mortgage payments rather than having to pay for it as one large lump sum.

Depending On Your State You Will Either Use an Escrow Company or Settlement Company

Escrow companies and settlement companies function in the same way with the same duties.

Depending on what state you live in, you may use a settlement company as opposed to an escrow company. Some states will even use attorneys or the Sheriff for certain settlement services. It can also vary from county to county within the same state.

In this post we use the terms escrow company and settlement company interchangeably.

What Are the Duties of Escrow?

Escrow companies do not make lending decisions. They are responsible to follow the rules as agreed upon by all parties involved. This includes, but is not limited to the following:

  1. Receiving authorization from the buyer and seller to set up an escrow. This is done via a purchase agreement and/or lender instructions.
  2. Writing the escrow instructions on behalf of the seller and buyer after reviewing the purchase agreement and/or lender instructions.
  3. Following instructions precisely and in a timely manner from the buyer, seller, real estate agents, loan officer and lender.
  4. Serving as a trustworthy, neutral third-party who is obligated to safeguard the funds and documents in their possession.
  5. Paying all bills as authorized by all parties.
  6. Providing accounting for the transaction using a closing or settlement statement known as a HUD-1 Statement.
  7. Assuring funds or property will not change hands until all conditions necessary to close the transaction are complete.
  8. Dispersing funds or transferring the title according to the instructions after all the conditions have been satisfied.

Escrow Is Responsible For One of the Most Important Documents: the HUD-1 Statement

The HUD-1, also known as a Settlement Statement, is a form used by the escrow agent which itemizes all charges you must pay for the mortgage transaction. The HUD-1 is prepared and finalized when loan documents are ready to sign to close your loan. The HUD-1 gives you a complete summary of all incoming and outgoing funds.

The HUD-1 includes the following items:

  • Accounting of the escrow transaction
  • All charges and credits to your escrow account
  • Purchase price or mortgage loan amount
  • All funds deposited or credited to your account
  • Payoffs on existing encumbrances or liens or payments due
  • Charges for all services (click here for a list of all closing costs)
  • Net proceeds (a final determination of the amount you are entitled to receive)
  • Required funds you must bring in to close the transaction, if necessary

Other Important Documents Escrow is Responsible For

When signing loan documents on a new purchase or refinance, make sure you request the deed, note and settlement statement to review in advanced of signing. Pay close attention to these documents and make sure all the information is correct and exactly as agreed upon with your lender.

Click here to learn more about these important documents.

What Does Escrow Cost?

The cost of escrow varies depending on the type of transaction, the loan amount and the number of parties involved. Typically, you can expect escrow to cost around 0.25% of the purchase price in a purchase, or loan amount in a refinance.

In addition to the escrow fee, you may also incur incidentals such as:

  • Wire transfer fees
  • Tracking or re-conveyance fees
  • Trustee fees
  • Electronic document fees
  • Courier fees
  • Fax fees
  • Copying fees
  • Trust accounting fees

How Can You Close Escrow On-Time?

Escrow is a detailed and well defined process. There are natural timeframes escrow will follow, either due to law or custom. That being said, escrow can become delayed due to the action or inaction of multiple parties. Here is how you can help escrow close on-time:

Follow All Instructions Quickly

Make sure to supply required documents and signatures as quickly as possible and as early in the day as possible.

Monitor On-Site Inspections

Your transaction will likely require on-site inspections such as an appraisal or home inspection. Be sure you and/or your agents arrange these appointments quickly, and with a company that can meet your deadline.

Communicate Regularly

It's a mistake to just sit back and wait. Communicate with all your mortgage professionals regularly and ask questions if you are unclear, or if anything just doesn't make common sense.

Escrow Works for You!

Escrow companies are comprised of skilled and experienced people. Use your escrow professional to answer questions that are important to you about the closing process of your loan. If you're not comfortable signing any documents until you have more information, that is your right. Remember, YOU are in charge and everyone is working for you.

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