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Home Buyer's Recession Survival Guide - What Is Escrow?

Updated on May 26, 2009

According to Investopedia:

Escrow is a financial instrument held by a third party on behalf of the other two parties in a transaction. The funds are held by the escrow service until it receives the appropriate written or oral instructions or until obligations have been fulfilled. An escrow account can be used in the sale of a house, for example. If there are conditions to the sale, such as the passing of an inspection, the buyer and seller may agree to use escrow. In this case, the buyer of the property will deposit the payment amount for the house in an escrow account held by a third party. This assures the seller - in the process of allowing the house to be inspected - that the buyer is capable of making payment. Once all of the conditions to the sale are satisfied, the escrow transfers the payment to the seller, and title is transferred to the buyer.

Escrow seems to be one of the aspects of buying a home which tends to confuse people the most. They know that there is some money sitting somewhere in limbo land between the seller and the buyer, but aren't really sure as to where it all is and why it's there in the first place!

To put it very very very simply, escrow is a holding account. It is money held in trust by a third party called an escrow officer between the seller and buyer. The third party has to verify that all of the pertinent prerequisites have been fulfilled, and that the buyer is in perfect agreement with the seller, and then they will release the funds. If there is something wrong and the deal falls apart, then they will return the money to the buyer, no harm done.

It is important to have an escrow since it satisfies both buyer and seller. The buyer knows that they've paid money but if something should go wrong they will definitely get it back and they don't have to fear the seller just absconding with it. The seller knows that the money is really there, it isn't just a shell game, and that once the deal is complete, that money will be transferred to their bank account.

Once everything is set, all the preconditions satisfied, then the escrow is closed. All that means is that the money leaves the escrow holding account and goes to the seller. By that time, the deal is irrevocable and the property changes hands.

There are a million and one reasons why escrow can take forever. Perhaps the buyer has submitted the funds in a way that requires verification, such as an out of state cashier's check. That can glue up the works for weeks. Or perhaps there is a sticking point, such as a home inspection problem, or a pest problem, or a title problem, or virtually any kind of problem. The escrow officer is usually smack dab in the middle of all this and gets heat from both sides to get the deal done. Unfortunately there is nothing that they can do since they are obligated by agreement and law to not close escrow until each and every one of the preconditions is fulfilled.

Read The Entire Survival Guide

Home Buyer's Recession Survival Guide - The Subprime Meltdown
Home Buyer's Recession Survival Guide - The Advantage Of Renting Over Buying
Home Buyer's Recession Survival Guide - Why Rent? Why Not?
Home Buyer's Recession Survival Guide - Five Common Mistakes House Buyers Make
Home Buyer's Recession Survival Guide - Get Your Home Sold Quickly & At Your Asking Price
Home Buyer's Recession Survival Guide - Improve Your Home's Value And Sell It For More!
Home Buyer's Recession Survival Guide - Learn The Value Of Curb Appeal
Home Buyer's Recession Survival Guide - Home Staging: Valid Selling Technique Or Fraud?
Home Buyer's Recession Survival Guide - Before You Go House Shopping
Home Buyer's Recession Survival Guide - The Home Condition Checklist
Home Buyer's Recession Survival Guide - Getting A Mortgage From Different Types Of Lenders
Home Buyer's Recession Survival Guide - What To Do After You're Turned Down
Home Buyer's Recession Survival Guide - New Initiatives To Help Get You Approved
Home Buyer's Recession Survival Guide - Isn't HUD An Old Paul Newman Movie?
Home Buyer's Recession Survival Guide - Jumbo Isn't As Huge As He Once Was
Home Buyer's Recession Survival Guide - FHA Q&A
Home Buyer's Recession Survival Guide - The FHA's Credit Requirements Vs. The Bank's
Home Buyer's Recession Survival Guide - Your Credit Score And Your Mortgage
Home Buyer's Recession Survival Guide - Credit Score Confusion
Home Buyer's Recession Survival Guide - Keeping That Credit Score Nice & High
Home Buyer's Recession Survival Guide - Minimize The Interest Payable
Home Buyer's Recession Survival Guide - What Is PMI & Why Do I Care?
Home Buyer's Recession Survival Guide - The LIBOR-COFI-COSI Alphabet Soup
Home Buyer's Recession Survival Guide - REO: Get Rich Quick Or Just Waste Time?
Home Buyer's Recession Survival Guide - Obtaining Flipping Money
Home Buyer's Recession Survival Guide - Consider The Additional Costs
Home Buyer's Recession Survival Guide - What Is Escrow?
Home Buyer's Recession Survival Guide - Tips To Avoid Foreclosure
Home Buyer's Recession Survival Guide - The Changing Value Of Your Mortgage Dollar
Home Buyer's Recession Survival Guide - How To Ride The Interest Rate Spikes
Home Buyer's Recession Survival Guide - Can't Get A Mortgage? What A PITI!
Home Buyer's Recession Survival Guide - Calculating Your Closing Costs
Home Buyer's Recession Survival Guide - Mortgage Broker or Mortgage Banker?
Home Buyer's Recession Survival Guide - The Magic Of A Down Payment
Home Buyer's Recession Survival Guide - A Refinance Checklist
Home Buyer's Recession Survival Guide - Refinancing With Bad Credit
Home Buyer's Recession Survival Guide - The Self-Employed Mortgage Maze
Home Buyer's Recession Survival Guide - VA Loans
Home Buyer's Recession Survival Guide - Offset & Reverse Mortgages
Home Buyer's Recession Survival Guide - The Reasons To Not Buy An Offshore Retirement House
Home Buyer's Recession Survival Guide - How To Pay Less Than $500 A Month
Home Buyer's Recession Survival Guide - Five Easy And Cheap Tips To Save Big $ On Energy

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    • Title Junction profile image

      Title Junction 

      7 years ago

      Good explanation of what escrow is! But it doesn't end there. Many first time homebuyers don't realize that their mortgage payment includes an escrow account for hazard insurance and property taxes. It's often something many first time homebuyers don't include in their budgets when buying a home. It's important to realize that escrow can add a big chunk of cash to a monthly payment.

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