How Does Escrow Work When Selling a House?

Escrow is a financial arrangement where a neutral third party holds funds and documents related to a real estate transaction. Its fundamental purpose is to safeguard both the buyer and the seller by ensuring that all conditions of the sale are met before money and property officially change hands.

Understanding Escrow and Its Purpose

Escrow is a legal arrangement where an independent third party, known as an escrow holder or agent, temporarily holds and regulates the exchange of funds and essential documents required for a property transfer. This arrangement establishes a secure environment for the transaction, reducing risk for both the buyer and the seller. The escrow holder acts as a neutral administrator, ensuring that all terms and conditions of the purchase agreement are satisfied before the transaction is finalized.

The primary function of escrow in real estate is to prevent fraud and mismanagement by verifying that all contractual obligations are fulfilled. This includes holding funds, such as the buyer’s earnest money deposit, and managing documents like the property deed. The escrow agent has a fiduciary responsibility to both parties, acting in their best financial interests. Key participants include the buyer, seller, lenders, and real estate agents, all relying on the escrow holder for a smooth and secure exchange.

The Escrow Process from Start to Finish

The escrow process begins once a purchase agreement has been signed by both the buyer and the seller, initiating the formal period for the transaction. This stage involves the buyer depositing earnest money into the escrow account. Earnest money, typically 1% to 3% of the home’s purchase price, demonstrates the buyer’s serious intent.

During the escrow period, typically 30 to 60 days, several milestones occur to ensure all contingencies are met. A preliminary title report is ordered to identify any liens or issues with the property’s title. Home inspections and appraisals are conducted, allowing the buyer to assess the property’s condition and market value, with potential negotiations for repairs or price adjustments arising from these findings.

The buyer’s loan approval process also unfolds during this time, requiring them to secure financing. Sellers contribute by providing necessary disclosures about the property’s condition and allowing access for inspections and appraisals. They must also respond to any repair requests and sign initial escrow instructions and other documents required for the transfer of ownership. Throughout this phase, sellers are responsible for keeping their mortgage payments current until the sale closes.

Managing Funds within Escrow

Escrow accounts serve as secure repositories for funds involved in a real estate transaction, safeguarding them until specific conditions are satisfied. The earnest money deposit, placed by the buyer to demonstrate commitment, is a primary fund held in escrow. Additional funds managed through escrow include the buyer’s down payment, loan proceeds from their lender, and the ultimate proceeds due to the seller.

These funds are held in escrow for distinct purposes; for example, earnest money assures the seller of the buyer’s serious intent, while the down payment and loan proceeds comprise the full purchase price for the property. The escrow holder ensures that no money changes hands until all contractual terms are fulfilled. Once conditions are met, the escrow holder orchestrates the disbursement of funds, which includes paying off any existing mortgages on the property, settling property taxes, and covering homeowner association fees, along with various closing costs.

Closing costs represent fees and expenses, typically 8% to 10% of the home’s sale price for sellers, managed through the escrow account. These can include escrow fees, title insurance premiums, recording fees, transfer taxes, and real estate commissions. The escrow account provides a centralized mechanism for managing these financial obligations, ensuring proper allocation and distribution of all monies involved in the sale.

Finalizing the Sale: Escrow Closing

The escrow process culminates in the official transfer of property ownership. Before the final closing, buyers often conduct a final walk-through to confirm the property is in the agreed-upon condition and any negotiated repairs have been completed.

At the signing appointment, both the buyer and seller sign documents. The seller signs documents such as the deed, which legally transfers ownership, and affidavits and disclosures. The escrow officer ensures all signatures are properly executed and notarized.

Following document signing, the transaction is funded, with the buyer’s down payment and loan proceeds being wired to the escrow account. Once all funds are received and verified, the escrow company records the deed with the county recorder’s office, officially transferring the property title from the seller to the buyer. The escrow holder then disburses the funds, paying off the seller’s mortgage, real estate commissions, and other closing costs, with any remaining net proceeds issued to the seller. The physical transfer of keys typically occurs once the sale is officially recorded and funds are disbursed.