Escrow is a term used when an asset or escrow money is held by a third party during a property transaction. The third-party works on behalf of two parties that are involved in the transaction. By doing this, sellers have an assurance that buyers have money to buy the property and their effort will not be in vain.
Why is escrow important?
Whenever there is a transaction to be made such as a house, parties involved in the transaction need assurance from each other. Having money in escrow gives the seller an assurance that the buyer will close on the transaction. Also, buyers get protected from sellers in case the transaction does not go through.
What would happen when you give your money directly to the buyer and later want to walk away from the deal? It could be difficult to get your money back. On the other hand, the seller would not sign contracts without assurance that the buyer has money to buy the property.
Relationship between escrows, offers, lenders, and closing
You will write a check to go to escrow when you make an offer to a property. This money cannot be touched by you or the seller until the deal is finalized. The check will give the seller an assurance that the buyer is serious.
If you are buying a house using a mortgage, your lender will hold money in escrow to be used for your home insurance and taxes. Why would your mortgage provider collects property insurance and tax from you? The house is not yours until it is fully paid off. The lender avoids any chances of losing their money on the property by not living anything to chances. That is why they collect interest and homeowner insurance with mortgage payments every month.
Finally, when the sale is completed; the escrow will have to be closed. The closing is done by a certified officer for this matter usually an attorney. He/she will make sure that all paperwork is signed, oversee the exchange of funds, and record the process. After all these activities, he will close the escrow.
