In the real estate industry, the term “escrow” can refer to two distinct concepts with each an important part of the property buying process. If you are involved in buying a home, know the difference between “being in escrow” for a real estate transaction and an “escrow account” for a mortgage loan.
Opening escrow for a real estate transaction…
…involves a neutral third party, known as an escrow officer, who holds all the documents and funds associated with the property purchase until all conditions of the sale are met. This includes the transfer of funds from the buyer to the seller and the secure handling of the property title. The escrow process ensures that the transaction is conducted fairly and legally, with all parties’ interests protected.
When a transaction is “in escrow,”…
…it means the escrow officer holds all funds and documents related to the transaction until all conditions of the sale are met. This includes the buyer’s earnest money, the seller’s deed, and any other pertinent documents. The escrow officer ensures that both parties fulfill their contractual obligations before finalizing the sale. Essentially, escrow acts as a safeguard to protect both buyer and seller throughout the transaction’s closing process.
On the other hand, an escrow account…
…for a mortgage is used by a mortgage lender to manage the ongoing expenses associated with owning a home. This account is established at the time of the transaction’s mortgage closing . Homeowners make monthly payments into this account, which covers property taxes, homeowners insurance, and possibly other fees like homeowners association dues. The lender then uses the funds accumulated in the escrow account to pay these bills on behalf of the homeowner. This ensures that these critical expenses are paid on time, preventing any lapses in coverage or penalties.
While both types of escrow serve as protective measures, they serve different purposes: one ensures a smooth and equitable transaction process, and the other manages property-related expenses throughout the life of the mortgage. Understanding these distinctions can help clarify the buying process for new homeowners and real estate professionals alike.