What Happens to Escrow When You Sell Your Home?

In a real estate transaction, “escrow” refers to a financial arrangement where a neutral third party holds funds and documents on behalf of the buyer and seller. This process safeguards the transaction by ensuring that money and property are exchanged only when all agreed-upon conditions of the sale contract are satisfied, reducing risks of fraud or disputes.

Handling Your Existing Mortgage Escrow Account

When selling a home, one of the escrow accounts involved is the one tied to your existing mortgage. This account, often established by your mortgage lender, holds funds specifically for paying your property taxes and homeowner’s insurance premiums. Rather than requiring you to pay these large, infrequent bills directly, the lender collects a portion with each monthly mortgage payment and deposits it into this account.

Upon the sale of your property, your mortgage lender will close this existing escrow account. The lender then undertakes a reconciliation process, reviewing the total amount of property taxes and insurance premiums paid on your behalf versus the funds collected in your escrow account. Any surplus funds remaining in the account after all outstanding obligations are settled will be refunded to you, the seller.

Conversely, if there is a deficit in the account, you would be responsible for paying that amount to the lender. Federal regulations require lenders to return any remaining balance in your escrow account after a loan is paid in full. Refunds are typically issued within 20 to 60 business days after your mortgage is paid off.

The Escrow Account for Your Home Sale

Separate from your existing mortgage escrow, a new escrow account is established specifically for the home sale transaction itself. This transactional escrow account serves as a secure holding place for all funds and essential documents related to the sale. Its primary purpose is to ensure that all contractual obligations between the buyer and seller are met before the transfer of ownership occurs.

An escrow holder, often a title company, attorney, or independent escrow company, acts as a neutral third party managing this account. This agent has a fiduciary duty to both the buyer and the seller, ensuring that the terms of the purchase agreement are followed precisely. Funds commonly placed into this account include the buyer’s earnest money deposit and eventually the full purchase price.

Beyond funds, the escrow account also holds important documents such as the property deed, loan documents from the buyer’s lender, and title insurance policies. The escrow holder ensures that all conditions stipulated in the sales contract, such as successful home inspections, appraisals, and loan approvals, are satisfied before releasing funds or property.

Finalizing the Sale: Fund Disbursement

The culmination of the home sale process involves the careful disbursement of funds from the sale transaction escrow account. Once all conditions outlined in the purchase agreement have been met and all necessary documents are signed by both parties, the escrow holder prepares a final settlement statement. This document, often a Closing Disclosure, itemizes all credits and debits for both the buyer and the seller.

From the funds held in escrow, several key disbursements are made. A primary allocation is the payment of your existing mortgage balance, ensuring that the lien on the property is released. Real estate commissions (5-6% of the sale price) are paid from the proceeds and split between the buyer’s and seller’s agents.

Additional closing costs are also paid from the escrow funds. These can include title insurance premiums, escrow fees, transfer taxes, and recording fees for updating public records.

Prorated property taxes and homeowners association (HOA) dues are also adjusted at closing. Since property taxes are often paid in arrears, the seller typically credits the buyer for the portion of the current year’s taxes covering the period after the closing date. Similarly, HOA dues are prorated based on the closing date, ensuring each party pays for the days they owned the property. After all these disbursements, the remaining net proceeds from the sale are then distributed to the seller.