First time home buyers can often become a little confused by the terminology used. One term that actually causes real concern is when an agent tells them their home is being sent to escrow. Of course, the home is not actually going anywhere – in fact, I am sure there are some real estate agents that take pleasure from making these announcements. So what is ‘escrow’?
You can liken escrow to a safety deposit box where a neutral third party holds the one and only key. Your down payment and the seller’s ability to sell the home are placed in this safety deposit box until all parts of the sales contract have been met. Closing, or settlement day, is just that. The third party that has the monies and title to the home meets with both parties. If all the paperwork is right, then the funds are taken out of escrow and distributed where the belong – this includes funds to the lender if the home is still under mortgage. There is a mistaken belief that home owners get all the money and then pay off the mortgage and real estate agent – but they don’t. This is all done at closing. At the same time, the new owners get the house keys, and if they are buying using mortgage funds, then the deed of title technically goes to the lender – that is their security.
Escrow was introduced to protect both buyers and sellers. In the past, a buyer would make an offer, which was accepted, pay their down payment, only to find another buyer stepping in with a better price. Worse still, some home owners would accept a range of offers, and the down payments, then disappear in the middle of the night leaving everyone out of pocket and trying to sort out the mess. Escrow is also a safe haven for down payments in that the seller is protected should the buyer wish to break the contract for no sound reason.
If you home is being sent to escrow, you know it’s going to a neutral third party for safe keeping. Your down payment, and the home, are technically safe.