What Does “in Escrow” Mean?
You have likely heard someone say, “We’re in escrow” when referring to their home buying process. Although this is a common phrase, many people have no idea what “in escrow” means, especially if they have never purchased a home before. And, if you plan to be in the home buying process in the near future, it’s best that you do know what this term means. So, in this blog post, we are going to explain what “in escrow” means, and other terms involved with the escrow process.
What Does “in Escrow” Mean?
To put it short and simple, “in escrow” means the buyer’s funds, also called earnest money, are being held to ensure the security of the buyer and the seller. This happens in the buying process when a buyer is negotiating a deal with the seller of the home. When the buyer and seller are negotiating contract terms and agreements, it can be risky to hand over the money to a seller. However, the buyer needs to show they truly want to make a deal. So, the money is held by a neutral third party until the deal is closed. This way, no one can touch it until then. With that being said, when someone says they are “in escrow,” it means they are in a period in which money is being held in a transaction.
The escrow process doesn’t only happen in real estate. Although it’s the most common scenario, escrow also happens in negotiating a deal with products and services. Often times, when there is a large contract in question, buyers and sellers prefer to enter escrow. This secures their positions to negotiate with each other while also securing their money. Just like with purchasing a home, the money isn’t moved from the third party’s possession until the buyer and seller agree on the contract’s terms.
What Is an Earnest Deposit in Real Estate?
As mentioned above, earnest money, also called an earnest deposit, are the funds the buyer gives to the neutral third-party. Writing an earnest check or providing an earnest deposit shows the seller you are truly interested in purchasing the home. You may hear people say, “I put down an earnest deposit for a house.” This is the same thing as entering escrow. After the buyer provides an earnest deposit, they have time to do the home inspection, appraisal, title search, and other checkups on the home. This shows the seller the buyer is interested, but needs time to make a final decision.
An earnest deposit must be held by a third party at all times. If not, the seller is in a position where they can hold your money as a negotiating tactic. You want your money to be protected but, at the same time, you want to let the sellers know you are interested in their property. Also, the seller is protected with an earnest deposit because the buyer shows they have intentions to pay for the home. So an earnest deposit will leave you both more secure in the long run.
Who Handles the Earnest Deposit?
If you are a part of a real estate transaction, you want to know who handles the earnest deposit. This money is either currently yours, or it will be yours, depending on if you are the buyer or the seller. Either way, it’s something you should keep track of.
There are specific jobs meant for handling earnest money. In fact, there are entire escrow companies who specialize in this process. At the end of the day, the person handling the earnest deposit when in escrow must be a neutral third party. It cannot be either the buyer or seller’s real estate agent, attorney, or associate. It must be someone who doesn’t have a bias towards either party and is reliable. This is to ensure the protection of both parties in the deal.
When Can Money Leave the Third Party’s Possession?
A buyer will hand their money over to a reliable third party to show they want to make a deal. However, sometimes deals fall through. This can happen when an inspector reports dangerous findings that are very costly. Or, it may be that the seller isn’t willing to negotiate on terms, so the buyer wants to back out of the deal. No matter the situation, the buyer doesn’t need to worry about the money they handed over originally. To get the money in escrow back, all they need to do is reject the transaction. Then, the seller needs to agree to the rejection.
When earnest money is held in escrow, it can make the disputing process much easier. When the two parties don’t agree on specific terms, they don’t have to rely on each other to give the funds back. This can save the two parties from legal issues in the future if they end up rejecting the transaction. The house and the money will be in a neutral state to ensure both parties are legally protected the entire time.
What Is a Hold-Back of Funds?
Sometimes, there may be bumps in the process of escrow. This may be because the seller’s new home isn’t quite ready for them. Or, it may be that your inspector found something wrong in the home, and your contract states it must be fixed. But, when you do your final walkthrough, you find the problem is still there. This can make your funds be held in escrow, which is called a “hold-back of funds.” Funds can be held in escrow to cover any costs the buyer needs to spend if they should have been fixed according to the contract.
Escrow and Lenders
If you are getting a mortgage on your home, your lender will likely require multiple things from you before they agree to purchase the home for you. One of the most common requirements is a home inspection. This is so they know the property is of good quality and safe. They will also request a title report and title insurance. Most banks require homeowner’s insurance as well, to ensure the home will receive repairs in the case of tragic events. Once the buyer and lender agree on the home, the escrow agent will get the loan money from them.
When you speak with your bank about the escrow process, they will likely talk about an escrow account. This account is with your lender and allows them to make payments on insurance and property taxes. The lender will collect these from you monthly to pay your bills on time. Your lender has an interest in seeing your payments are paid, considering they are the ones who initially pay for the property. So, if they discuss these things with you, they are being cautious for both your sakes.
You may also talk with them about prepaids. This is money you hand over in advance, so the lender has enough to pay for the bills. Doing this may be in your best interest to ensure they have enough to pay for these things out of their own pocket and don't potentially fine you later.
What Happens to the Escrow During Closing?
The last stage of escrow is the “closing of escrow.” This is where the earnest deposit is transferred to the seller, and you get the keys to your home. A closing officer will provide the legal paperwork that states the house is officially yours and you are responsible for the payments. They will also make sure the funds are distributed according to the contract. Once the officer decides the contract’s terms and conditions are met, they will close the escrow.
Do You Have to Use Their Title Company?
Often times, it’s the buyer’s real estate agent who suggests an escrow company. This is because the buyer wants to feel as though their money is secure. As a seller, it may be intimidating to work with someone suggested by the buyer’s real estate agent. So, sellers wonder if they must work with a specific company. The answer is no. You can request a different escrow company until the buyer agrees with you. This way, you can both feel 100 percent protected.
If you don’t go with an escrow company that is recommended by a real estate agent, you will need to find one yourself. This can be difficult work, but it may be worth it in the long run.
How to Choose Your Escrow Company or Title Agent
Choosing an escrow company or title agent is very similar to choosing any other company. You want to look at their reviews to see if they are knowledgeable and trustworthy. Many escrow companies have Yelp pages, Facebook profiles, Google My Business listings, and others. You can also ask your real estate agent for their recommendations. Real estate agents should have a handful of escrow companies they have worked with, and they will likely know who you should consider using.
If you are ready to purchase a home in the Pensacola, Florida area, feel free to contact us! Our team will help you find a great home, as well as put you in touch with a trustworthy escrow company. We look forward to working with you!