Just when you think you’ve got a handle on the home buying process, your agent calls to tell you that they will be opening escrow.
What does opening escrow mean, and why is this the first you have heard of it?
What does it mean to open escrow? After a purchase agreement is signed, the buyer’s earnest money and the seller’s deeds are deposited, in an “escrow account” with an Escrow Officer. This independent third party oversees the closing process, ensuring all paperwork is correct and legally compliant. Once this process starts, you are said to have “opened escrow.”
“Escrow” is a type of account, but it’s not like a bank account where you deposit or withdraw money. Instead, you can think of it as more of a period of time during which all of the details of your home purchase are overseen by a person who has no connection to the buyer or seller. This person also holds items of value such as the deeds and the earnest money to protect the buyer and seller.
Let’s take a look at the details behind escrow.
Who Opens Escrow?
Technically speaking it doesn’t really matter who opens the account. If you Google, “Who opens an escrow account?” you receive a wide variety of answers. Generally, it depends on what is standard practice in the state where you are buying your home.
In some states, it is usual for the buyer’s agent to open escrow, while in others it is the seller’s agent.
Either way, you don’t have to worry about doing it yourself, the sale will not move forward until escrow is open.
Who Chooses The Escrow Officer Or Company?
It is up to the buyer and the seller to agree on an escrow agent or company.
But guess what?
Opening escrow usually happens without much, if any discussion with the buyer and the seller as to who to use for escrow. This happens because agents typically use the same person over and over and open escrow with them as a matter of course.
This is not usually a problem, except….
You should, as a matter of due diligence, ask about who will be handling the escrow, before it is open. In some states, escrow can be handled by an escrow department which is overseen by a bank, real estate agent, or title insurance companies. This, in itself, is not an issue but you should ensure you are getting the best quality service at the right price for you and not merely being signed up with an internal department who may under-deliver and over-charge.
How Long Is Escrow Open?
Escrow stays open until either :
- The sale is complete, all documentation has been signed, papers have been correctly filed, and the proper financial transactions have taken place.
- The seller backs out for some reason
- The buyer backs out for some reason.
What Happens After Opening Escrow?
Escrow is a time period during which the escrow officer:
- Holds items of value, usually:
- The earnest money cheque
- Title deeds of the home,
- The loan documents
- Tracks all legal and financial steps during the sale, including some or all of the items below:
- Ordering a title search, asking any question related to the search, reviewing answers, and communicating any issues to the buyer and seller and lender.
- Ensuring your financing documentation is in place, that it is all correct, signed, and that when added to your earnest money and deposit the total covers the agreed sales price and closing costs.
- Reviewing your file to confirm the following reports are in place:
- Home appraisal
- Home inspection
- Pest & environmental inspections
- Specialist inspections such as mold or roof
- Sellers disclosures
- Checking that all applicable insurances, such as title insurance are in place.
- Confirming with both parties and the lender details of property tax and utility payment agreements.
- Reviewing your file to confirm the following reports are in place:
- Communicates with parties in the transaction to ensure due diligence is followed an nothing is missed. This contact is usually with the bank and the real estate agents and not directly with the buyer and seller.
- Ensures correct finance is in place at closing.
- Creates, compiles, collates, and reviews all of the documents for the sale, as needed.
- Conducts the closing and when this is complete, files a new deed in the buyer’s name.
Basically speaking the escrow agent or officer is the person who independently carries out all of the administrative tasks in the sale, after an offer has been accepted and a sales agreement has been signed.
Escrow is carried out in this way, so there can be no bias towards either the buyer or the seller.
Who Closes Escrow?
Escrow is closed when the escrow officer closes your file. This usually happens after the new deed has been filed in your name. You do not need to do anything to ensure the account is closed.
For buyers who have an FHA mortgage, things go a little differently.
After closing and the filing of the deed, the escrow account stays open. Each month the homeowner pays 1/12th of the annual property taxes and insurance into the account. At the end of the year, when payment is due, the full amount is there waiting. Then the next year’s monthly payments will be calculated to take account of any adjustments.
In this case, it might also be referred to as a “mortgage holding account,” and the account holder must send the homeowner a statement each year detailing all deposits and payments.
How Much Does Escrow Cost?
As with most of the items when buying a home, the exact fee will depend upon where you live and the particular professional with whom you work.
In some parts of the US, escrow fees are calculated at between 1% and 2% of the property price. So if you buy a home which costs $350,000, you’ll pay between $3,500 and $7,000.
In other areas, the fees are more commonly between 3% and 5%, a cost of $10,500 and $17,500 for the same home.
Then, just to be difficult
Some companies charge a base fee, PLUS a percentage of the final property price.
This is the reason it’s so important to check how much escrow will cost on each and every purchase. Don’t assume that just because last time it was 1% that it will be the same this time, or in this location.
How Is The Escrow Officer Paid
Although your mortgage application will be approved pretty early in the purchasing process, the actual money will not be released by your lender, until the closing meeting at the end of the escrow period.
Once the escrow officer receives this money, it will be added to your deposit, your earnest money, and any contribution to the closing costs agreed to by the seller.
Together, the mortgage, your deposit, and your earnest cheque will pay for the home and the closing costs for which you are responsible.
The escrow officer is responsible for distributing the money to the relevant people. As part of this process, the escrow officer will be responsible for taking their agreed fee from the total amount deposited and, effectively, paying it to themselves.
Therefore, whoever is paying for escrow does not have to carry out any action to make the payment; it is done for them.
Which brings me onto a question more important than “HOW is the escrow officer paid.”
Who Pays For Escrow
Just as with other aspects of the purchasing process, what is common practice in one area of the country would be shocking in another. And so it is with who pays for escrow.
Closing costs are often all rolled in together and, in this case, whoever agrees to pay closing costs pays for escrow.
Every property purchase is different. Variables such as the current state of the real estate market, the final price paid, and how skilled a negotiator the buyer or seller are, will all determine how responsibility for costs are split.
This is another crucial reason to take the time to read every detail of every offer and counteroffer, before signing a sales agreement.
If you fail to notice that you have agreed to pay for escrow, you’ll be scrambling for thousands of dollars to complete the sale.
Put simply, when you open escrow you, or to be precise your real estate agent, hires an escrow officer to be an independent administrator of the sale. Only the escrow officer has control of the deeds, the money, and the documents of the sale, and this ensures neither the seller nor the buyer can corrupt or scupper the deal.
Additional Information From Real Estate Experts
How Soon Should I Put Money Into Escrow? – Glenn Shelhamer
How To Become A Home Owner – Bill Gasset
Understanding Credit Report With Tips To Improve Bad Credit – Eileen Anderson
About The Author
Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.