What is escrow?
Escrow involves a third party that holds money or documents and distributes them according to specific instructions. Escrow can be used to protect the interests of the involved parties in many different types of sales transactions. However, escrow is most commonly used during the purchase of a home.
Choosing a Third Party to Handle Escrow
While escrow laws differ in every state, most states allow for one of three people to handle a home purchase transaction along with the escrow process. All states allow lawyers to handle escrow accounts and most lawyers already use escrow accounts when accepting retainer payments, so they are a natural choice by states. The next choice, a mortgage broker or bank, is also accepted by all states. These institutions are more than capable to setting up the escrow account and they will typically provide the paperwork for you.
Some states also allow real estate agents to handle escrow. In states such as California and Arizona, real estate agents are considered capable of handing the entire home purchase from start to finish, including escrow.
Understanding Escrow Accounts
Once you have found a home, you will be asked to prove that you have the money to afford it. You can pay for the home with your own cash or obtain approval for a mortgage from a bank. In either case, the funds for the purchase will be placed in a special account known as an escrow account. This account does not gain any interest and the money cannot be used by the bank for any other purpose. It just sits in the account for the required amount of time, which is typically 30 days.
Once the escrow account is funded, you are free to begin your inspections. The type of inspections you do are dependent on your mortgage company, but most require termite and utility inspections. Once the house passes these inspections and the reports are sent to the mortgage company, you can sign the final documents, including the release of escrow funds to the seller. This document authorizes the seller to remove the funds from the escrow account and give you the key to your home.
Getting Legal Help with Escrow
If you are involved in the sale or purchase of property and need more information about your specific case, you should speak to an attorney familiar with real estate law and the escrow process.