What is Escrow?

By Karen Lawson
CMR Columnist

Your realtor calls with great news: "Your offer has been accepted, and we've opened escrow." What is an escrow, and how does it work? Understanding the escrow process will help clarify the process of buying a home.

Escrow Companies Manage the "Paper Trail"

Mortgage lenders typically take one to three months to fund your new mortgage. Once your loan is approved, escrow is opened. The escrow process is overseen by a third-party entity that serves as a depository for all funds exchanged in a real estate transaction. The escrow company collects and disburses funds as needed until your mortgage lender is ready to disburse your loan proceeds. When all conditions of the escrow are met, and all funds disbursed, the escrow is "closed."

What Happens During My Escrow?

Here are some basic steps of the escrow process. Of course, each escrow varies according to terms and conditions, and all are subject to unforeseen situations.
  1. Offer approved. Escrow opened
  2. Buyer's "earnest money" deposited with escrow holder
  3. Good faith estimate of costs to be paid by buyer and seller issued by escrow holder
  4. Loan approval process begins
  5. Requirements of lender, buyer, and seller (as stated in escrow instructions) are met
  6. Buyer deposits down payment (if not done previously)
  7. Buyer's lender deposits mortgage loan proceeds into escrow
  8. Escrow holder collects and disburses funds according to HUD 1 statement
  9. Buyer's loan documents and Grant Deed are simultaneously recorded
  10. Escrow closes

Escrow Costs

Costs paid through escrow can include, but aren't limited to:
  • Appraisal fee
  • Preliminary title search and title insurance policy
  • Home inspections and warranty
  • Lender's fees and costs (origination fees, document fees, etc.)
  • Real estate sale commission (usually paid by seller)
  • Recording fees
  • Disbursements on behalf of buyer and seller
  • Sellers' mortgage loan(s) against the property
  • Liens against property
  • Escrow fee

The HUD-1, or settlement statement, itemizes all deposits and disbursements made during your escrow. Read it carefully, and contact your escrow company with questions. You'll want to keep your finalized HUD-1 as part of your records.

Sources
Fannie Mae
Real Estate ABC

About the Author
Karen Lawson is a freelance writer with more than 15 years of experience in mortgage lending. She has an MA degree in English.

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