When you hold something in ‘escrow’ you give a neutral third party possession of a valuable. In the case of real estate, you give the third party the buyer’s money and the seller’s deed. This third party is neutral – he does not care one way or the other if the buyer buys the home or if the seller sells the home. The escrow agent’s job is to make sure all conditions are met on both sides of the equation.
You need this neutral third party to help make sure everyone does their part in the process. The buyer must come up with the necessary financing by the specified date. The seller must oblige to the inspection and appraisal as well as deliver the property in good condition upon the closing. Of course, there are nuances and conditions that pertain to both of these situations, of which the neutral third party helps keep things straight.
What the Escrow Agent Does
Upon signing a purchase agreement, the escrow agent holds onto the escrow deposit that the buyer makes. He also holds onto the seller’s deed for the home. The agent then makes sure that the seller allows the inspection and appraisal. He also oversees any issues or objections that arise during the process. This goes for either side of the transaction, buyer or seller.
It’s not until the closing that the escrow agent’s job is complete. Once the conditions are met and the transaction closes, the agent gives the buyer back his money and the seller the deed. The method he gives the buyer the money back depends on the situation. It could be a straightforward refund. He could also give it to the title company to use towards your down payment.
Why Use an Escrow Agent
You might wonder why you would want to use an escrow agent when you can just write a check to the seller. Giving him this good-faith deposit lets him know you are serious about buying the home. But what happens if the seller goes back on his word? What’s to say he will give you the money back? There’s no guarantee which is why you need that neutral third party.
How Escrow Protects the Seller
As a seller, you don’t get the money the buyer put down, but it still benefits you. By forcing the buyer to put down a deposit, which is usually 3% of the sales price, you make him responsible for buying the home. In other words, he can’t go out and put bids on several other properties, unless of course he has money to throw out the window. Once the buyer puts the money down, he is tied to that home and required to meet the contractual obligations. If he doesn’t, he risks losing his money. The seller would then receive the money and be able to market the home to other buyers.
When Buyers can Back Out
There are certain situations when a buyer can back out of a contract and not lose their escrow deposit. When this happens depends on the contingencies in the contract. The most common are:
- Financing contingency – This gives buyers a specific time period to find proper financing. If they cannot secure an ‘approved without conditions’ from the bank before this date, they can request their escrow money back and back out of the sale.
- Inspection contingency – Buyers need time to have an inspection done on a home before they commit to buying it. This contingency gives buyers a specific time period to secure the inspection and review the report. If there is something wrong with the home that the seller will not fix or pay for, the buyer can back out without losing his earnest money.
- Appraisal contingency – Buyers also have the right to determine the value of a property before fully committing to purchase it. If the appraisal does not come back at the sales price or higher, the buyer can back out of the purchase. In reality, they wouldn’t be able secure financing in this situation either, so as long as they have one contingency or the other, they should be covered.
Escrow covers both the buyer and seller from any type of corrupt behavior during the home buying process. Sellers have the reassurance that buyers won’t go out and buy another home leaving them high and dry. Buyers have the reassurance that the seller will allow the inspection and appraisal, giving the buyer an out if they don’t meet the specifications stated.Click to See the Latest Mortgage Rates»