How Escrow Works

Once your offer on a home or other real property has been accepted by the seller, your transaction is then placed into "escrow."

"Escrow" is a term that describes the neutral third-party handling of funds, documents, and tasks specific to the closing (or settlement, as it is also known), as outlined on the real estate purchase agreement or sales contract. The purpose of escrow is to facilitate the transaction by managing the disbursement of funds and documents.

Closing Around the Country

The real estate closing process varies around the country, but every transaction requires coordination between skilled professionals. While escrow is common in many western states, in other areas of the country, settlement is completed at what is known as a "table closing."

Key Players in the Escrow Process

The escrow process requires a team effort. Your escrow officer will play a key role in the process, but homebuyers, sellers, lenders and real estate professionals are also integral throughout the process.

In many states, the escrow officer is known as the "closer." In other states, licensed attorneys handle escrows, but often work with a closer from a title company to do some of the processing.

While a real estate agent may recommend an escrow company or officer, the buyer and seller have the right to choose their settlement service providers.

Escrow requirements vary, so your closing could require a home inspection, the purchase of homeowners insurance, the completion of negotiated repairs and the completion of financial requirements set forth by your lender.

To help encourage a more efficient transaction, it's important to understand the key roles in the escrow process.

  • Image of Buyer
  • Image of Seller
  • Image of Real Estate Professional
  • Image of Buyer Escrow Officer
  • Image of Buyer Lender

Buyer

  • Reading and understanding the escrow instructions, agreements, terms and conditions
  • Responding promptly to any correspondence regarding the transaction
  • Carefully reviewing all closing documents
  • Confirming the purchase price and costs of all services
  • Preparing for any funds required to close the transaction
  • Safely storing closing statements and other escrow documents for tax purposes

Seller

  • Reading and understanding the escrow instructions, agreements, terms and conditions
  • Responding promptly to any correspondence regarding the transaction
  • Carefully reviewing all closing documents
  • Confirming the selling price and closing costs
  • Preparing for any funds required to close the transaction
  • Safely storing closing statements and other escrow documents for tax purposes

Real Estate Professional

  • Provides the escrow officer with information necessary to create the escrow instructions
  • Facilitates communication between all parties to the transaction
  • Tracks milestones within the transaction to expedite the process
  • Helps resolve possible issues between buyer and seller

Escrow Officer

  • Adheres to escrow instructions (outlined in the sales contract)
  • Processes the escrow
  • Closes the escrow
  • Pays bills, fees and charges as outlined in the escrow instructions
  • Disburses funds
  • Provides settlement documentation

Lender

  • Provides specific instructions to the escrow officer
  • Processes and funds the loan
  • Provides Closing Disclosure

What is Escrow?

Click here to learn more about the escrow process with an easy-to-read-infographic.

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Process

Once all transaction contingencies are met, including the execution of all documents necessary to complete the transaction, the escrow company will disburse funds to the seller and other parties, all in accordance with the purchase agreement.

Cost

The cost of escrow services is covered by the buyer or seller as determined by local custom, market conditions or contractual agreements made within the purchase offer.

"Closing"

Once all the tasks described within the sales purchase agreement have been completed and the appropriate funds are disbursed, the transaction is complete and the escrow closes.

Recording Documents

While signing your loan documents is a big step, a real estate transaction doesn't become "official" until the appropriate documents are recorded in public records. This step, referred to as "recording," happens when the escrow or title company sends the deed, as well as the deed of trust (the attached mortgage) to the county recorder's office.

Transaction Forms and Disclosures

Throughout the escrow process, you'll receive various forms and disclosures from your lender, your title company and your escrow company. These include the Loan Estimate and the Closing Disclosure, two forms the Consumer Financial Protection Bureau requires your lender to provide. After your transaction closes, you'll also receive a Settlement Statement from your title or escrow company.

Protect Your Information

When you buy a home, you'll be required to submit personal information to your lender and/or settlement or escrow agent. This information may include social security numbers, bank account numbers and credit and loan account numbers. Unfortunately, would-be fraudsters sometimes attempt to steal personal information and even money through real estate transactions. Here are some tips to help keep your information and your transaction secure.

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