A community-based law firm serving businesses and individuals with real estate transactions, corporate law legal needs and planning for the future.

The role of escrow in a real estate sale

On Behalf of | Jul 18, 2024 | Real Estate |

Buying or selling real estate is a complex process that comes with many steps and requirements. If this is your first time completing a real estate transaction, you may hear several unfamiliar terms, such as escrow.

Since most real estate transactions in Texas involve large amounts of money changing hands, it is important that the money stays safe and with someone trusted as the process goes forward. That is the role of escrow.

Typically, the buyer and seller agree that money is held in escrow while the real estate transaction is pending. An escrow account is a neutral account where money is held until distributed.

An escrow agent is a neutral third party who oversees the account. The escrow agent handles when and how the money is distributed.

Advantages of escrow

Escrow has many benefits. It is designed to protect everyone involved, specifically the buyer and mortgage lender. It increases the chance that all parties will fulfill their responsibilities and obligations to complete their duties under the real estate contract.

An escrow account holds earnest money, which is a deposit made by the buyer after a purchase agreement is signed and before the title is transferred to the buyer as the new owner. It also holds closing funds until they are distributed after the sale is complete.

If you are a buyer and your earnest money goes into an escrow account, read your purchase agreement carefully before signing and ensure that it states what happens to the earnest money is the sale cannot be completed.

Many times, a purchase agreement states that a buyer will receive their earnest money back if something happens that causes the sale to fall through, such as the property not passing inspection or the buyer being unable to secure financing.

Escrow for mortgage lenders

Mortgage lenders also usually use escrow accounts to hold funds for property taxes and insurance. Rather than depending on the mortgage borrower to make these payments themselves, mortgage lenders often add the cost of insurance and taxes into the monthly mortgage payment.

The mortgage lenders then deposit the money for these costs into an escrow account where they remain until they are paid.

You must generally pay fees to the escrow agent for using an escrow account. These costs are typically paid on the day of closing.

How long does escrow take?

How long money stays in escrow during a real estate transaction depends on the specifics of the transaction itself. Every transaction is different.

However, a purchase agreement normally includes a closing date, so it is expected that all funds from the escrow account will be distributed on that date and the escrow account closed.

Closing dates are subject to change, depending on how long it takes to complete appraisals and inspections and secure financing.

Escrow funds are usually not released until the buyer, seller, mortgage lender and any other parties to the sale agree that all terms of the transaction are complete.