What Happens to Money in Escrow When You Sell Your House?
Demystify where your house sale money goes and how it's managed by a neutral third party during escrow.
When a home is sold, money held in an escrow account serves as a protective measure for both the buyer and the seller. A neutral third party, the escrow agent, holds funds and documents related to the transaction. The purpose of escrow is to ensure that all conditions of the sale are met before the transfer of ownership and funds occurs. It acts as an impartial facilitator, safeguarding assets until every contractual obligation is satisfied, providing security throughout the complex real estate transaction process.
Establishing the Escrow Account
Funds enter an escrow account with the buyer’s serious earnest money deposit. This deposit demonstrates the buyer’s intent to purchase and is usually a percentage of the sale price, often 1% to 3%. The purchase agreement outlines the deposit terms, including the amount and conditions for refund or forfeiture. After the agreement is executed, the buyer wires or delivers the earnest money to the escrow company, opening the account. The escrow holder maintains these funds until closing, following instructions agreed upon by both parties in the sales contract.
Expenses Paid from Escrow
The escrow account manages financial obligations related to the sale. A significant deduction from the gross sale price is the payoff of the seller’s existing mortgage, ensuring a clear title. Real estate agent commissions, typically 5% to 6% of the sale price, are also disbursed from escrow. Property taxes and homeowner’s association (HOA) dues are prorated between the buyer and seller based on the closing date, with the seller’s portion paid from escrow funds.
Additional expenses paid from escrow include title insurance premiums, which protect against title defects. The seller may be responsible for the owner’s title insurance policy, ensuring the buyer receives a clear title.
Escrow fees, compensating the escrow company, are also deducted, typically 0.5% to 1% of the sale price, often split between the buyer and seller. Recording fees, paid to the local government to record ownership transfer and new mortgages, are disbursed from these funds. Agreed-upon repair credits or contributions towards the buyer’s closing costs, stipulated in the sales contract, are also handled through the escrow account, reducing the seller’s final proceeds.
Receiving Your Proceeds
After all deductions and payments, the escrow agent calculates the net proceeds due to the seller. This involves subtracting all seller-paid closing costs, prorated expenses, and other agreed-upon charges from the original sale price. The escrow agent prepares a closing statement, such as a Closing Disclosure, which itemizes credits and debits, providing a financial summary for both parties. This document ensures transparency regarding the final distribution of funds.
The disbursement of the seller’s net proceeds occurs after all closing documents are signed and recorded. Common methods include a wire transfer to the seller’s bank account or a cashier’s check from the escrow company. Wire transfers may be received the same day as closing, but can take one to three business days to fully clear. Prompt disbursement by the escrow agent marks the final stage of the financial transaction, completing the sale.