Understanding Escrow When Buying or Selling a Home

When you buy or sell a home, there are several steps to the real estate transaction. Escrow is the period of time between when you sign a contingent agreement and when you close on the home. Escrow can also refer to a sum of money that a buyer places with the lender in good faith for completing the transaction. Escrow agents handle the escrow process. Whether you're the buyer or the seller, it's important to know the pros and cons of using escrow for the real estate transaction.

Escrow Instead of a Title Agent

You can use escrow in lieu of a title agent. A seller can choose this method of closing the purchase of a home. The escrow agent will prepare the title and deed. The escrow agent is responsible for finding any liens or other potential disputes or claims on the property before the transaction can proceed. The buyer can pay for supplemental title insurance for coverage against errors and omissions from the escrow agent. Escrow services have fees, but they are similar to a title agent's fees.

Inspection Contingency

As a buyer, the inspection contingency of escrow works in your favor. If the pest, structural, roof or general home inspection reveals a major problem, the escrow process gives you a chance to back out. If you find out that the home will require more repairs than you can afford, escrow gives you a chance to walk away with no penalties. There is a time limitation to escrow. If you miss the deadline, you're stuck in the deal unless a lawyer can get you out of it. 

Protect Your Finance

As a buyer, using escrow protects your money and investment. If you were to purchase a home that has a lien from an unpaid contractor, city tax collector, utility company or court-ordered child support, you could lose the money you've invested in the property. The escrow protects you from this potentially ruinous situation. 

Buyer's Right for a Final Walk-through

Escrow provides buyers with the right to a final walk-through. If the seller has failed to make the agreed repairs, clear their personal property or do something else in the contract, the escrow gives you rights. Your escrow might allow you to get out of the deal penalty-free, get paid a fee by the seller or renegotiate the deal if you choose to proceed with the purchase.

Lender Assumes More Responsibility

Under escrow, sellers benefit from the buyer's lender assuming more responsibility for the payment of property taxes and insurance. Buyers also benefit from this. However, it also means that the buyer's money is held interest-free in the escrow, so the buyer isn't able to use it for anything else or collect interest on it. Sellers only get the money from the sale of the house once the transaction clears escrow, which can take extra time compared to using a title agent.


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