Escrow is a legal practice where a third party keeps money in a specified account for a predetermined period. This is done until a specific condition is satisfied, such as completing a purchase agreement.
3 Types of Escrow
Escrow accounts are classified into three types:
- Seller Escrow: The buyer makes a deposit that does not belong to them. It is held in an account, and the funds are only released when certain conditions are met. If the conditions are unmet, the money is returned to the buyer.
- Third Party Escrow: A third party, such as a title company or escrow agent, is used to hold onto money while the transactions are finalized.
- Buyer or Seller Financed Escrow: This is when the buyer or seller makes a mystery deposit. This is given back to them or held by an escrow agent contingent upon their successful credit application or a successful closing.
The escrow process is typically initiated when a real estate purchase agreement is signed. The title company or escrow company takes title to the property during the closing period. It holds it until the buyer, and the seller has fully satisfied their obligations to one another. At that time, the title company or escrow company initiates the transfer of title to the buyer.
The escrow process is also commonly used in business transactions and in the application process for credit, insurance purchase, and fund a retirement plan.
5 Steps Involved in the Escrow Process
After lining up a mortgage and as you make an offer on a home, the escrow process will be broken down into several phases.
- Title Search. A title search is performed by a lawyer or title insurance company to verify that the seller and/or real estate agent/broker give the buyer accurate information about the property.
- Title Report. The title company provides the title report and describes the condition of the property’s title. The title report includes legal description, recorded liens or encumbrances, tax information, parcel maps, special assessments, zoning, and easements. The title company also performs a title search, which verifies the title is clear.
- Title Insurance. A lender may require a title search and title insurance to protect the lender against loss. However, the lender has a claim on the title insurance policy available to the borrower.
- Down Payment. In some instances, the seller may require the buyer to provide a down payment to the seller. The buyer pays a down payment at the time of closing and is often 10 percent of the purchase price but can be more or less. The down payment helps increase the lender’s security in the event of a default.
- Closing. The closing is the final stage of the escrow process. At closing, the escrow company transfers funds from the buyer to the seller.First, the buyer’s lender will issue a funds release order to the escrow company. The funds are then distributed to the seller and buyer. Any remaining funds are distributed to the lender. The buyer will get keys to the house.In addition, the seller is typically required to sign the title over to the buyer.Some states have laws that assert that an escrow agent must ensure that the money is distributed correctly after completing the closing.
Your Team at Mortgage City!
The escrow process can be a complicated legal procedure, but it must protect all interested parties. If a seller or buyer does not want to use an escrow company, they can ask the other party to hold onto the money until the contract conditions are met.So, escrow is a way to ensure that both the buyer and seller are protected during buying and selling a home. It prevents fraud, which is prevalent in the real estate industry. Sometimes, escrow is also used to get a mortgage, buy insurance, and fund a retirement plan.
If you’re seeking reputable mortgage brokers in Michigan and beyond who can help you get a loan to buy a property, go no further than our services at Mortgage City. We provide a variety of financing choices that will allow you to get into the home of your dreams in no time. We are licensed in Michigan, Florida, New Hampshire, Texas, California, Massachusetts, Indiana, and Ohio. For more information on your home financing choices, please contact us at (248) 930-8709.
