Many borrowers, although familiar with their loan officer or Realtor, ask, “What is escrow?” It is defined as a third person with whom a contract is deposited – kind of a neutral party, a referee for a real estate transaction.
For a contract to be valid it needs two parties, so part of the contract is that both parties agree who will do the escrow, the holder of their contract. In real estate, escrow is a third party that the buyer and seller, or in the case of a refinance the borrower and the lender, use to transact funds from one party to the next; escrow is also referred to as the settlement agent.
Given instructions agreed to by both parties, the escrow holder agrees to accept funds from the buyer, and the buyer's lender if necessary, and then after paying costs for other services involved in the transaction, deliver the funds to the seller once all promises are fulfilled in exchange for a grant deed from the seller that is delivered to the buyer. Escrow is neutral and has no agency contract with the buyer or seller, its agency is with the transaction.
Escrow plays a vital role in real estate transactions since large sums of money flow through escrow companies on a daily basis for purchase and refinance transactions. Escrow is not only charged with making sure the initial instructions are followed but also that neither party is able to change the transaction without the consent of the other. At closing, escrow is responsible for disbursing funds to all the parties and services involved in the transaction, refunding overages to buyers or borrowers, pay fees to termite, title, home warranty, lender and themselves, and transmit the net proceeds to the seller.
Lastly, after the closing, escrow provides a very detailed accounting of all funds received and disbursed to all parties. A good escrow officer and company are like a good ref in a soccer match – you don’t really notice them unless they mess up.
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