What Does It Mean When a House Is in Escrow?
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Richard Haddad Executive EditorClose
Richard Haddad Executive EditorRichard Haddad is the executive editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
Buying your first home can be exciting, but it can also feel overwhelming at times. There will be a lot happening that involves money you’ve saved and money you’re borrowing. You’ll hear your lender and real estate agent use the phrase “house in escrow.”
In this post, we explain the meaning of having a house in escrow and clarify the two types of escrow accounts: the one used during the homebuying process and the one used after you buy your home.
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What does ‘in escrow’ mean in real estate?
When a house is “in escrow,” it means a neutral third party temporarily holds the funds and documents related to the transaction. This ensures that both the buyer and the seller fulfill their respective obligations before the sale is finalized. The escrow process protects both parties and helps facilitate a smooth transaction.
As a buyer, the two main purposes of escrow are to hold your earnest money and manage the funds related to the sale until all conditions of the escrow agreement are met. The escrow process typically takes 30-45 days to complete.
What’s happening while a home is in escrow?
During the escrow period, several key activities take place to ensure the home sale stays on track. Here’s what you can expect:
- Title search: Verifying the property’s legal ownership and any existing liens or claims.
- Home appraisal: Assessing the property’s market value to ensure it aligns with the purchase price.
- Home inspections: Conduct a thorough inspection of the property to identify any issues that need addressing.
- Required repairs: Making necessary fixes based on inspection results.
- Buyer financing and insurance: Securing a mortgage and obtaining homeowner’s insurance.
- Zoning research or property surveys: Ensuring the property complies with local zoning laws and accurately determining its boundaries.
What is an escrow account in real estate?
As noted above, while your home is in escrow, a third party will manage the documents and funds needed to complete the purchase. After the purchase, there will still be money that needs to be managed as part of your mortgage agreement and tax and insurance requirements.
To process both ends of your transaction, there are two main types of escrow accounts in real estate:
1. Escrow account while buying a home
During the homebuying process, an escrow account holds the buyer’s earnest money deposit, which is sometimes referred to as a good faith deposit. Funds for closing costs and other needs are also sometimes held in this account.
If the purchase agreement falls through and it’s determined to be the buyer’s fault, the seller usually keeps the money. If all goes well, the earnest money is typically applied to the buyer’s down payment.
Funds from this account are only released when all the conditions of the sale are met, such as inspections and appraisals we listed above. During the homebuying process, an escrow company or escrow agent is responsible for managing this escrow account
2. Escrow account after buying a home
Once you’ve purchased a home, most lenders will set up an escrow account to manage payments for property taxes and homeowners insurance. Each month, a portion of your mortgage payment is deposited into this account, and the lender uses these funds to pay your taxes and insurance premiums when they’re due.
This helps ensure that these critical expenses are paid on time, avoiding penalties or lapses in coverage. After you’ve closed on your home, your mortgage servicer typically continues to manage this escrow account.
While less common, there is another type of escrow account used after a home sale called an escrow holdback. As its name implies, it is an account that sets aside a portion of the homebuyer’s money until specified repairs are satisfactorily completed. A lender might approve an escrow holdback when repairs are delayed by factors outside a seller’s control, such as weather. A holdback may also be used if the seller still has an outstanding utility or other property-related bill that needs to be paid.
What does it mean to close escrow?
Closing escrow is the final step in the homebuying process. It means that all the conditions of the sale have been met, all necessary documents have been signed, and the funds have been distributed to the appropriate parties.
At this point, the buyer officially takes ownership of the property (you get the keys). The escrow agent or company releases the funds to the seller, pays off any remaining costs like agent commissions and title fees, and transfers the title to the buyer. This signifies the completion of the sale, and you are now the homeowner.
What is an escrow payment?
An escrow payment is a portion of your monthly mortgage payment that goes into the escrow account managed by your lender. This account is used to pay property taxes, homeowners insurance, and sometimes other expenses like mortgage insurance.
By making escrow payments, you and your lender ensure that these bills are paid on time without having to save up large sums of money throughout the year. The lender calculates your escrow payment based on the estimated annual costs and divides it into monthly installments added to your mortgage payment.
What is an escrow statement?
An escrow statement is a detailed summary provided by your mortgage servicer that outlines the transactions in your escrow account over a specified period. This statement typically includes:
- The starting balance of the escrow account
- Monthly escrow payments collected from you
- Payments made for your property taxes and insurance
- An estimate of upcoming escrow payments (increase or decrease)
- Notices about any projected escrow shortage in funds
- Notices of a negative balance or escrow deficiency that needs to be paid
The escrow statement helps you keep track of how your escrow funds are being used and ensures that your account has sufficient funds to cover your expenses. It’s usually provided annually and helps you understand if there will be changes to your monthly escrow payment.
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Is an escrow account required to buy a house?
An escrow account is typically required by lenders who provide VA, FHA, and conventional loans. In some situations, a lender may allow the homeowner to waive escrow and pay their home insurance premium and property tax directly as a lump sum instead of paying through an escrow account. However, this is uncommon because doing so can result in the lender charging a fee or applying a higher interest rate to your mortgage loan.
In most cases, it doesn’t make financial sense for you to opt out of escrow. Having the account makes it easier to manage your home insurance, and you avoid unexpected bills at the end of the tax year.
A top agent can help guide you through escrow
Buying a home and navigating the escrow process can feel daunting, especially for first-time homebuyers. An experienced real estate agent can provide guidance and answer your questions throughout the process.
HomeLight can connect you with a top-performing, trusted agent in your buying area. We analyze over 27 million transactions and thousands of reviews to determine which agent is best for you based on your needs.
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