How Escrow Protects Home Buyers and Sellers

In real estate, an escrow account is a secure holding area where important items such as the earnest money check and contracts are kept safe by an escrow company until the deal is closed and the house officially changes hands.

Escrow also is a contractual arrangement in which a third party—usually the escrow officer—maintains money and documents until the deal is done. Here, realtor.com explains the process.

How much does escrow cost?

That varies—as well as whether the buyer or seller (or both) pays—with the fee for this real estate service typically totaling about 1 percent to 2 percent of the cost of the home.

The earnest money deposit

Earnest money—also known as an escrow deposit—is a dollar amount buyers put into an escrow account after a seller accepts their offer. The escrow company will hold onto that money for the duration of the transaction.

Another way to think of earnest money is as a “good-faith” deposit into an escrow account that will compensate the seller if the buyer breaches the contract and fails to close.

Can you borrow earnest money from your lender?

Earnest money can be borrowed from your lender, but there are certain rules involved. First-time buyers are most likely to need to go to their lender for their earnest money. The lender will ultimately count the earnest money as part of the down payment on the house.

What is an escrow account?

When you make your monthly payment to your lender, part of it goes toward your mortgage and a portion of it goes into your escrow account for property taxes and insurance premiums (such as homeowners or mortgage insurance). When those bills are due, your lender will use the funds in your escrow account to pay them.

How escrow protects you

Here’s how escrow can work in your favor. For example, the buyer had a home inspection contingency and discovered that the roof needed repairs. The seller agrees to fix the roof. However, during the buyer’s final walk-through, she finds that the roof hasn’t been repaired as expected. In this case, the seller won’t see a dime of the buyer’s money until the roof is fixed. 

However, during the buyer’s final walk-through, she finds that the roof hasn’t been repaired as expected. In this case, the seller won’t see a dime of the buyer’s money until the roof is fixed. 

Sellers also benefit from escrow. It might be disappointing if the buyers get cold feet at the last minute and bail on the transaction, but at the very least, buyers have typically paid a sizable amount for their earnest money deposit.

This money, often totaling 1 percent to 2 percent of the purchase price of a home, has been held in escrow. When buyers back out with no legitimate reason, they forfeit that money to the seller.

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